Despite the moderate 9M17 performance, the seasonally strong 4Q should drive the group to meet our full-year estimate. We continue to like OCK for its attractive growth prospects and growing recurring revenue stream. Post results review, we have tweaked our FY17/FY18E numbers by -6%/-1%. Maintain OUTPERFORM rating but with lower DCF-driven TP of RM1.00 (WACC: 8.0%, TG: 1.5%).

Below expectations. 9M17 PATAMI of RM17.6m (+20.3% YoY) came in below expectations at 51%/52% of our/market consensus full-year estimates (vs. the historical 9M contribution of c.56-60% range of fullyear results for the past two years). On our end, the key culprits were mainly due to (i) the lower-than-expected contributions from the Telecommunication Network Services (“TNS”) segment (which we believe was partially due to the lumpy engineering works contribution) and Green Energy division; and (ii) higher-than-expected administrative expenses. No dividend was declared, as expected.

YoY, 9M17 revenue improved by 19% to RM351m as the higher TNS increased by 26% to RM306m, mainly underpinned by its tower leasing business from Myanmar and Vietnam. OCK had completed more than 640 telco towers in Myanmar and secured new co-location agreement with the largest state-own telco operator, Myanmar Posts and Telecommunications (“MPT”). Besides, the group has also secured an additional 300 telco towers order from International Myanmar Company Ltd (Mytel) on a build and lease model. In Vietnam, its operation there continued to bear fruits from its existing 1,983 telecommunication sites (backed by the long-term lease rentals) which were acquired through the acquisition of 60% of SEATH in early 2017. PBT meanwhile advanced by 25% to RM33m as a result of higher turnover and better margins recorded in its TNS and Green Energy segments. To date, regional revenue has soared to contribute 35.3% of the group’s total turnover vs. 18.4% a year ago. QoQ, 3Q17 turnover was up by 5%, with positive contributions from all segments, except the green energy & power division as well as the lumpy trading segment. PBT improved by 7% in tandem with the top-line performance with margin retained at 9.8%.

Outlook. Upon the completion of c.1.2k telecommunication towers in Myanmar, OCK will have approximately 3.4k sites by end-2018 across Malaysia, Myanmar and Vietnam. The group is set to continue benefiting from the rapid network expansion plan undertaken by these telcos. We understand that the group seeks to venture into other IndoChina countries for greenfield/brownfield opportunities to own more telecommunication sites to achieve its vision of becoming an ASEAN Tower co. and increase its recurring income stream. Apart from focusing on the telecommunication business, we understand that the group is also sourcing for more business and/or investment opportunities in the sustainable energy sector which is rapidly growing in demand.

Maintain OUTPERFORM call. Post review, we have lowered our FY17/FY18E PATAMI by 6%/1%, after incorporating the lower 3Q17 performance and reduce our revenue and margin assumptions. Correspondently, our DCF-driven target price is reduced to RM1.00 (WACC: 8.0%; TG: 1.5%) vs. RM1.05 previously. Having said that, 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.

Source: Kenanga Research - 29 Nov 2017