Despite delivering lower revenue in 1H18, core PATAMI came in within expectations after stripping off the unrealised forex loss. We continued to like OCK for its attractive growth prospects and growing recurring revenue stream. No change in our FY18-19E numbers for now, pending an analysts’ briefing today. Our OUTPERFORM stock call and target price of RM0.850 are currently under review.

In-line. 1H18 core PATAMI of RM11.9m (11.4% YoY) came in within expectations at 44%/38% of our/market consensus full-year estimates. The core PATAMI was derived after adding the unrealized forex loss of RM2.6m. The latest quarterly results are within the historical 1H contribution of c.37-42% range of full-year results for the past three years. No dividend was declared, as expected.

YoY, 1H18 revenue weakened by 6% to RM213m, mainly due to lower contribution from the telecommunication network services (“TNS”) segment as a result of the softer domestic sales. Despite lower turnover, its GP margin managed to climb 165bps to 26.4% (to RM56.4m,+0.6% YoY) as a result of higher number of co-locations. The better GP, however, did not translate into a better PBT, no thanks to the higher administrative expenses (which increased 10% YoY) and unrealised forex loss of RM2.6m. To date, regional revenue contributed 40.9% of the group’s total turnover vs. 35.8% a year ago. Noteworthy, the group’s Malaysia operation’s PAT declined by 47% to RM3.8m (vs. RM7.3m in1H17) despite its revenue merely softening by 13%. We believe, the thinner margin was mainly led by higher OPEX as a result of stiffer competition.

QoQ, 2Q18 turnover improved from the seasonally low 1Q, higher by 19%, mainly underpinned by better contribution from the TNS segment. PBT, however, was flat at RM8.7m with margin softening to 7.6% (vs. 9.0% in the preceding quarter) due to higher OPEX.

Outlook. The group is set to continue benefiting from the rapid network expansion plan undertaken by various telcos in the OpCos countries. We understand that the group seeks to venture into other Indo-China countries for greenfield/brownfield opportunities to own more telecommunication sites to achieve its vision of becoming an ASEAN Tower company and increase its recurring income stream. OCK has completed and owns 850 towers in Myanmar with 1.4x tenancy ratio and 700 (telecommunication sites) outstanding order-book to be rolled out. On the Vietnam operation’s front, OCK owns more than 2.3k telecommunication towers to date (with a tenancy ratio of 1.3x). The fragmented towerco ecosystem in Vietnam and 4G LTE roll-out in the near future could provide brown and greenfield opportunities for the group to expand further. 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.

Under Review. We made no changes to our forecast and target price for now, pending an analysts’ briefing today. Having said that, we are likely to keep our FY18/19E earnings estimate largely unchanged in view of the moderate 1H18 performance. Our current stock rating is OUTPERFORM with a target price of RM0.850 derived on DCF- methodology (WACC: 8.5%; TG: 1.5%). Risks to our call include: (i) higher-than-expected OPEX, (ii) lower-than-expected margins, and (iii) stiffer competition.

Source: Kenanga Research - 29 Aug 2018