We continue to like OCK for its attractive growth prospects and growing recurring revenue stream despite some short- term headwinds. Following its 4Q17 results briefing and earnings model update, we have lowered our FY18E earnings by 27%. Maintain OTPERFORM call but with lower DCF-driven TP of RM0.95 (WACC: 8.0%, TG: 1.5%).

Record revenue but…. OCK reported continuing revenue growth of 21% YoY (to RM485m) in FY17 with an expanding EBITDA of RM99m (+51% YoY) and higher margins. The higher revenue in FY17 was primarily driven by better Telecommunications Network Services (TNS, +24% YoY to RM416m) and M&E Engineering segments. Regional business accounted for an increasing proportion of the group’s total revenue at c.33.5% (or RM163m) against c.20% in FY16. Tower operations in Myanmar contributed RM46.2m of overseas operations with growing 780 revenue generating sites (as of mid-February) from 622 sites during the preceding quarter. Over to Vietnam, SEATH accounted for 31% of FY17 regional revenue or RM50.1m during the period.

….bottom-line hit by higher forex and OPEX. The group’s PATAMI, however, dipped by 7.5% YoY to RM24.6m, no thanks to the adverse movement of forex (where RM has been strengthening against the USD by 6% in 4Q17) coupled with margin erosion in the Indonesia business as well as higher-than-expected OPEX (due to higher administrative expenses as a result of taller overhead cost). After normalizing for the forex movement, OCK’s core PATAMI was up 15.1% YoY to RM25.6m.

Continue to ride the growing telecommunication wave in Myanmar. OCK has completed and hand over 713 sites (as of mid- February) with additional 102 sites set to be delivered to Telenor Myanmar in the coming months. While Telenor Myanmar sites deployment appears to be slow, OCK has secured a new build-to-suit and co-location agreements with Myanmar Posts and Telecommunications (MPT, as a second tenant) in last April and had identified 169 co-location sites on top of the newly awarded 21 build-to- suit sites. Mytel (as the third tenant), on the other hand, has identified 106 co-location sites, and OCK has completed and handover 83 sites to the former. The tenancy ratio for the current 713 sites (including the co- locations) stands at 1.29x vs. 1.25x (with 642 sites) in the preceding quarter.

SEATH updates. The group’s Vietnam operation, meanwhile, have a tenancy ratio of 1.28x (with 2,558 tenants under its tower count of 1,998) currently. We understand that the group is having the discussion with several towercos to acquire tower assets and/or companies with a total number of towers over 600.

Slashed our FY18E PATAMI by 27% to RM27.5m, after reducing our top-line estimate by 16% (to reflect the slower engineering and fibre works in the TNS segment) and raising our OPEX assumptions (to reflect the short-term headwinds ahead). Besides, we also take this opportunity to introduce our FY19E numbers.

Maintain OUTPERFORM but with lower DCF-driven TP of RM0.95 (vs. RM1.05 previously). 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 - 28 Feb 2018