OCK has signed a MOU with ISOC to jointly pursue the telecom tower business in The Philippines. We are positive on the move as it could enhance its recurring revenue stream. We made no changes to our FY18/19E earnings forecasts. Maintain OUTPERFORM call with unchanged DCF-driven TP of RM0.950.

Eyeing tower business opportunities in The Philippines. OCK Vietnam Towers Ptd Ltd, a sub-subsidiary of OCK, has entered into an exclusive 1-year Memorandum of Understanding (“MOU”) agreement with ISOC Infrastructures, INC., (“ISOC” which is mainly involved in the logistics, property, energy and infrastructure businesses) to pursue opportunities to acquire, install, operate, maintain and manage telecom tower assets in the Philippines. Besides, the collaboration also allows both parties to explore opportunities in the new towers' rollout/greenfield projects and potential sale-and-leaseback project from mobile telecom operators.

The Philippines telecommunication industry has tremendous potential for growth according to the management given its lowest telecom towers per capita at 152 towers per 1 million capita vs. the ASEAN’s average of 579. Besides, Philippines’ 4G access is also the lowest at 59% vs. the ASEAN’s average of 72%. OCK believes the collaboration with ISOC will provide the group an advantageous platform to penetrate into The Philippines and drive the group’s future business growth.

The Philippines’ tower market landscape. The Philippines has about 16.3k telecom towers as at end-3Q17, according to TowerXchange, a research outfit. The country has no independent tower companies as sizable towers (c.9k) are controlled by Smart Communications, Inc. (a wholly-owned wireless communication and digital services subsidiary of the country’s largest telecommunications and digital services provider - PLDT, Inc.) while the rest belongs to Globe Telecom. The research outfit also highlighted operational costs in the Philippines are phenomenal due to the geography of the country as maintenance visit to a remote tower would require various transportations (i.e. flight, boat or even a donkey ride up to a mountain). This has resulted in significant outsourcing to managed services subcontractors. To counteract the OPEX challenge, both Globe and Smart are currently investing in substantial network modernization programs, including the upgrade of backup power solutions.

No financial effect for now. The execution of the MOU is not expected to have any financial impact to the group in FY18. Nevertheless, we understand that management is hoping for a positive contribution on its earnings in the future should the projects are finalized and commercialized.

Maintain OUTPERFORM with an unchanged DCF-driven TP of RM0.950 (WACC: 8.0%; TG: 1.5%). The recent share price weakness could provide bargain hunting opportunities to long-term investors given the group’s intact prospect. We continue to like OCK for its: (i) healthy cash flow on the back of escalating recurring income trend, (ii) ability to ride with the passive infrastructure sharing trend, (iii) EBITDA margin expanding trend, and (iv) potential growth through M&A activity.

Source: Kenanga Research - 29 Mar 2018