We continue to like OCK for its attractive growth prospect and growing recurring revenue stream. Following its 1Q18 results briefing and earnings model updates, we tweaked our FY18-19E earnings by <1%. Maintain OUTPERFORM call but with a lower DCF-driven TP of RM0.850 (WACC: 8.5%, TG: 1.5%).

Solid start for FY18. OCK reported a decent PATAMI of RM5.1m (+8.6% YoY) in 1Q18, thanks to better-than-expected margin recorded in regional Opcos (as a result of more lease income on the back of higher number of co-location sites) although turnover weakened by 8.5% YoY (to RM97.5m) due to lower domestic sales. Management attributed the tepid performance mainly to cautious capex spending (from the local incumbents) prior to GE-14. Regional contribution continued to climb in 1Q18 and accounted for 43%/97% (1Q17: 38%/61%) of the group’s total turnover and PAT, respectively.

Better business opportunities in the local market post GE-14. OCK foresees growth opportunities in Sarawak with the newly formed Sarawak Multimedia Authority set up by the state government to spearhead the Sarawak Digital Economy Strategy 2018-2022 (a five- year digitalization transformation road map). The state plans to invest c.RM1b and increase telecom towers from 1.2k currently to over 5k towers. Besides, OCK also expects new build-and-own telecom tower business opportunities in Perak, Melaka and Negeri Sembilan (where telecom tower businesses were controlled by state-owned companies previously), in view of the current more liberalized regulations under the new ruling parties.

Continue to ride the growing telecommunication wave in Myanmar. OCK has completed and hand over 830 sites (as of 25 th of May) of which 754 sites were delivered to Telenor Myanmar and 76 sites to Mytel. While Telenor Myanmar sites deployment appears to be slow (with 166 sites yet to be delivered), OCK has secured and delivered more co- location sites (335 vs. 83 sites in 4Q17) during the quarter. The tenancy ratio for the current 830 sites (including the co-locations) stands at 1.4x vs. 1.29x (with 713 sites) in the preceding quarter. Noteworthy, the group has achieved a milestone in leasing its telecom towers to all four major mobile operators in Myanmar (i.e. MPT, Telenor, Ooredoo and Mytel).

SEATH updates. The group’s Vietnam operation, meanwhile, have a tenancy ratio of 1.29x (with 2,732 tenants under its tower count of 2,118) currently, following the recent acquisition of 118 towers for c.USD1.5m. We understand that the group is having discussion with several towercos to acquire another 700 tower assets, with funding coming from internally generated fund.

Maintain OUTPERFORM but with a lower DCF-driven TP of RM0.850. We have tweaked our FY18-19E earnings marginally by - 0.6%/-0.3% after fine-tuning and incorporating the 1Q18 performance into our earnings model. Our target price, however, is trimmed to RM0.850 (vs. RM0.950 previously) after revising our WACC assumption to 8.5% (vs. 8.0 previously) to take the recent telecommunication sector de-rating (as a result of the revised broadband policy, which could affect incumbents’ capex allocation moving forward) into consideration. Having said that, 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 flows 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 - 01 Jun 2018