After visiting its Vietnam operation, we continue to like OCK for its attractive growth prospect and growing recurring revenue stream. We made no changes to our earnings forecast. Maintain OUTPERFORM call with an unchanged DCF-driven TP of RM0.750.

At the forefront of mobile growth revolution in Vietnam. OCK ventured into Vietnam’s telecommunication tower in January 2017 through a 60%-owned Southeast Asia Telecommunications Holdings Pte Ltd (“SEATH”). SEATH is the largest independent base transceivers station (BTS) owner in Vietnam, with 1,998 telecommunications towers (as of the end-CY17 and accounted for c.19% of independent tower market share) geographically dispersed throughout Vietnam. The group’s tower portfolios are mainly comprised of Ground based (87%) and Rooftop Based (13%). All the towers are backed by long-term lease rentals (c.5-10 years) from the major mobile network operators in Vietnam (i.e. MobiFone, VNPT and Vietnamobile).

Rapid adoption of mobile services in Vietnam. Vietnam’s 3G subscriptions penetration rate has surged to 34% (or 41.3m subscribers) in the year 2017 from 25% two years ago and projected to cross the 50% ratio by 2021. Besides, the country has started to roll out the 4G/LTE services last year, and anticipating that more towers would be required to accommodate the latest technology. On the regulatory front, while there is no specific license required to operate as an infrastructure service provider in Vietnam, there are comprehensive framework and tower construction permits that are required. On top of that, different tower construction permits (that comprise various requirements) are required in different provinces, and any site acquisition would also require the government as well as neighboring sites (given that most of the smaller independent towercos are “mom and pop shops”) to grant the No Objection Certificate to the towercos. All these stringent regulations are barriers of entry for the new comers.

Riding on the consolidation and co-location wave. The group’s Vietnam operation, meanwhile, have a tenancy ratio of 1.29x (with 3,087 tenants under its tower count of 2,397) currently, following the recent acquisition of 399 towers. Moving forward, SEATH is aiming to focus on business growth via acquisition (with a minimum criteria set at 50% EBITDA margin and 12% IRR) with a targeted new site growth rate of 10-15% per annum and achieve 1.5-1.6x tenancy ratio in the next five years. We understand that the group is having a discussion with several towercos to acquire another 550-600 tower assets by year-end (which could boost its tenancy ratio to 1.36x, if successful), with funding coming from internally generated fund and/or borrowings. With a large geographical spread and fragmented ecosystem, there are certainly opportunities for consolidation as well as co-location.

Maintain OUTPERFORM with an unchanged DCF-driven TP of RM0.750. We made no changes to our FY18-19E earnings estimate post the recent site visit in Vietnam. Our target price is maintained at RM0.750 (WACC: 9.1%; TG: 1.5%). Stock valuations appear attractive following the 35% retracement YTD. 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. 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 of its towerco unit (OCK SEA towers) and earnings-accretive towerco mergers & acquisitions.

Source: Kenanga Research - 11 Oct 2018