We continue to like OCK for its attractive growth prospect and growing recurring revenue stream. Following its 1H18 results briefing and earnings model updates, we tweaked our FY18-19E earnings lower by 3%/7%. Maintain OUTPERFORM call but with a lower DCF-driven TP of RM0.800 (WACC: 8.8%, TG: 1.5%).

Moderate 1H18 results. OCK reported a moderate core PATAMI of RM12m (+12% YoY) in 1H18. Despite lower turnover in 1H18 (-6% to RM213m, due to lower domestic telecom network services and green energy segment’s contribution amid cautious mode adopted by local operators and slower government project), its GP margin managed to climb 165bps to 26.4% (to RM556.4m, +0.6% YoY) as a result of a higher number of co-locations. The marginally improved GP, however, did not translate into a better PBT as a result of higher administrative expenses (which increased 10% YoY). Regional contribution continued to climb in 1H18 and accounted for 41%/88% (1H17: 36%/58%) of the group’s total turnover and PAT, respectively.

Expecting decent business opportunities locally. OCK has been awarded few hundred built-to-suit sites from a local telecom operator (post the latter ending its network sharing and alliance agreement) and set to deliver c.70-100 sites by the end CY18. Besides Sarawak (where OCK has formed a JV company with local parties), the group is also in discussions with state-backed operators in Perak, Melaka, Terengganu, Kedah and Negeri Sembilan (where telecom tower businesses were controlled by state-owned companies previously) to explore new build- and-own telecom tower business opportunities, in view of the current more liberalized regulations under the new ruling parties.

Continues to ride the growing telecommunication wave in Myanmar. OCK has completed and hand over 850 sites with 393 co- location sides. While slower growth in towers built is expected during the current raining season, the group is expecting to ramp up its progress in the remaining months and achieve c.1k towers by the end of CY18. The tenancy ratio for the current 850 sites (including the co-locations) stands at 1.4x with 700 (telecommunication sites) outstanding order-book to be rolled out. Besides, the group is also set to clinch another 300 built-to- suit sites from Ooredoo, of which details are likely to be finalised in the coming months. OCK 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 3,087 tenants under its tower count of 2,393) currently, following the recent acquisition of 399 towers. We understand that the group is having a discussion with several towercos to acquire another 500 tower assets, with funding coming from internally generated fund and/or borrowings.

Maintain OUTPERFORM but with a lower DCF-driven TP of RM0.800. We have reduced our FY18-19E earnings by 3%/7% after incorporating the 2Q18 performance and revise our OPEX assumptions into our earnings model. Our target price, meanwhile, is trimmed to RM0.800 (vs. RM0.850 previously) after revising our WACC assumption to 8.8% (vs. 8.5% previously) to take the heightened broadband competition (which could affect incumbents’ capex allocation moving forward) into consideration. Stock valuations appear attractive following the YTD’s 31% retracement.

Risks to our call include: (i) weaker-than-expected earnings and margins, (ii) change in regulatory and (iii) cash call. Key share price re- rating catalyst, meanwhile, include spin-off its towerco unit (OCK SEA towers) and earnings-accretive towerco M&A.

Source: Kenanga Research - 30 Aug 2018