We are keeping our optimistic view on OCK after attending the group’s 1Q17 results briefing. We continue to favour the stock for its attractive growth prospects and growing recurring revenue stream. Post model update, we have tweaked our FY17/FY18E numbers marginally. Maintain OUTPERFORM call with higher DCF-driven TP of RM1.05 (from RM0.96 previously) after lowering our WACC to 8.0% (vs. 9.1%) to reflect rising investor risk appetite and increase share liquidity.

Solid starting for FY17. OCK reported a strong revenue growth of 36% YoY (to RM106m) in 1Q17 with PBT advancing 59% to RM9m as a result of higher turnover and better margins recorded in its TNS and Green Energy segments. Regional businesses, meanwhile, accounted for c.37.6% of the group’s total revenue in 1Q17 as compared to 20% a year ago. OCK Yangon’s tower business contributed higher revenue of RM8.6m (vs. RM4.8m in 4Q16) with 610 revenue generating sites coupled with co-locations for its c.40 sites. The group’s Vietnam venture – SEATH contributed its maiden revenue of RM11.6m during the quarter post consolidation from midJanuary.

Finalising the new coordinates. Telenor Myanmar has reverted c.30 coordinates (out of the remaining 310 sites under the initial build-and-lease contract (920 towers), which were held back by Telenor Myanmar since 2H16 as a result of new coordinates planning) for new site build-ups. With most of the required materials already in place, management believes it can hand over those sites to Telenor Myanmar within the next two months. Besides, management also highlighted that Telenor Myanmar has shifted its focus to grow its population coverage instead of nationwide coverage previously. Thus, this suggests that the remaining towers are likely to be built in more strategic city-centric locations, which could yield an advantage for OCK as those sites could provide good co-location potential and attract additional tenants in the future. Indeed, Myanmar Post and Telecommunications (MPT) has shown interest to expand the number of co-location sites further after it entered a long-term lease agreement with OCK for its c.100 sites recently. The tenancy ratio for the current 610 sites has improved to 1.15x and management is aiming to achieve 1.3x-1.4x by year-end with more co-locations sharing in place.

Aiming to double its tower portfolio. OCK is keeping no secret of further expanding its tower portfolio to 5k (from the current 2.8k) through organic and/or M&A activities. Management believes it will take another 3-5 years to double its current tower portfolio through the organic road-path. Alternatively, the expansion road-path could shorten significantly should any M&A opportunities emerge in the future. Management is of the view that it will likely collaborate with partners as well as raising its funds via debt/financing instruments rather than through equity in the next M&As.

Fine-tuned FY17/FY18E PATAMI by -1% each, post the results review. We continue to like OCK for: (i) its healthy cash flow on the back of escalating recurring income trend, (ii) spreading its wings in Myanmar and across Southeast Asia, (iii) its ability to ride with the passive infrastructure sharing trend, (iv) its EBITDA margin expanding trend, and (iv) potential growth through M&A activity. Key risks to our call include: (i) project risks, (ii) dependence on directors and key personnel, and (iii) dependence on major customers/contracts.

Source: Kenanga Research - 1 Jun 2017