We are keeping our optimistic view on OCK despite revising our FY16E/FY17E PATAMI by -6%/+22%, respectively, after the 3Q16 results briefing. The strong FY17E growth is mainly underpinned by the maiden full- year contribution of its regional towerco assets. Maintain OUTPERFORM call with higher TP of RM0.96 (vs. RM0.93 previously post earnings revisions) based on DCF valuation (WACC: 9.1%, TG: 1.5%).

Solid 9M16 results. OCK reported a strong revenue growth of 40% YoY (to RM294m) in 9M16 with EBITDA advanced by 36% YoY, in- tandem with its top line performance. Its PATAMI, however, recorded lower growth of 12% YoY (to RM14.6m) as a result of higher finance cost and minority interest. Indeed, the group’s minority interest is set to increase further given that OCK does not own 100% stake in some of its lucrative telecommunication network services (TNS) projects as well as Myanmar and Vietnam’s tower operations. Regional businesses accounted for c.18% of the group’s total revenue in 9M16 as compared to 16% a year ago. OCK Yangon’s tower business, meanwhile, is starting to contribute maiden revenue of RM1.6m (from c.290 revenue generating sites) but incurred start-up losses of c.RM2.3m in 3Q16. Nevertheless, management believes its Yangon’s tower business EBITDA will be in the black once it hands over 400 sites to Telenor Myanmar.

Tweaked FY16E/FY17E PATAMI by -6%/+22% after imputing higher GP margin in FY17 (27% vs. 24% previously), based on the latest run-rate but with a higher minority interest (in FY16 & FY17).

Revised tower delivery target. The number of tower delivery targets (to Telenor Myanmar) has been revised downwards to 520 (vs. 720 previously) due to network re-planning by Telenor. OCK Yangon has successfully completed and hand over 405 sites to Telenor as of end- November with another 145-195 towers set to be delivered by end- CY16. Despite some hiccups from the Norwegian-owned celco, the group is confidence to deliver all promised sites by 1Q17. Besides, we also understand that discussions have commenced with Myanmar Post and Telecommunications (MPT) on co-locations, which could further enhance tenancies moving forward, if successful. Note that, Telenor’s exclusivity on site will expire after the two-month handover. All the telecommunication towers have installed sufficient specification to cater for three players. The Myanmar project is expected to contribute c.RM60m revenue per annum (based on a tenancy ratio of 1.0x) with a lucrative targeted EBITDA margin of c.60%. Should OCK Yangon manage to improve the tenancy ratio, it would provide a positive catalyst to OCK’s forward earnings thanks to the lucrative margin contribution.

SEATH acquisition is set to complete by January-2017. OCK has been granted 100% approval from shareholders to acquire Southeast Asia Telecommunications Holdings Pte Ltd (SEATH) during the recent EGM and is set to complete the acquisition by January 2017. SEATH is the largest independent base transceivers station (BTS) owner in Vietnam, with 1,938 (accounting for c.19% of independent tower market share) telecommunications towers geographically dispersed throughout Vietnam. The towers are backed by long-term lease rentals (c.5-10 years) from mobile network operators in Vietnam (i.e. MobiFone, VinaPhone, and Gmobile). The tenancy ratio of SEATH group is expected to improve to at least 1.27x (vs. 1.26x currently and the industry average of <1.2x) by end-CY16. SEATH has achieved an annual turnover of RM46-49m over the past three financial years with net profit of RM7.2-7.6m. Moving forward, we understand that OCK expects SEATH to record c.USD10-12m turnover per annum with c.50% EBITDA margin.

Source: Kenanga Research - 01 Dec 2016