OCK has filed an application for a case dispute arbitration in China, which is expected to be resolved within the next 9 months with a higher prospect of winning. We made no changes to our earnings forecast for now, pending the upcoming results. Maintain OUTPERFORM call with an unchanged DCF-driven TP of RM0.750.

Filed an application for arbitration in China. OCK announced that an application for arbitration was filed to the China International Economic and Trade Arbitration Commission (CIETAC) in Shanghai, China on Monday against Nokia Shanghai Bell Co., Ltd (formerly known as Alcatel-Lucent Shanghai Bell Co., Ltd) and Branch of Alcatel-Lucent Shanghai Bell Co., Ltd (collectively, the “Respondents”). The dispute arose from the breach of subcontract agreement entered between OCK Phnom Penh and the Respondents in April 2014, where the Respondents subcontracted the works and/or supply of materials or services in relation to USD5.49m (including USD1.8m variance amount arises accordance to the Respondents’ on-site instructions and other related written instructions) worth of the Greater Mekong Telecommunication Backbone network project located in Cambodia.

Despite the Respondents already made a partial payment, it still failed to pay the remaining aggregate outstanding progressive payment and the variance amount of USD2.93m. With that, the group has commenced arbitration proceedings in China to claim the amount stated above in full, plus late payment interest of total USD186,142 (at 4.75% p.a. as of end 9 November 2018).

Dispute likely to be resolved in the year 2019. Management believes the arbitration case is likely to be resolved within 6-9 months and stands a strong opportunity to win after consulting various legal parties. Should the group win the disputes, it is likely to recoup a handsome c.20% margin from the said project.

Near-term shares overhang was clouded by the non-shariah- compliant concern. OCK believes the recent share price weakness (where the stock has fallen 47% YTD) was mainly triggered by the upcoming shariah-compliance status review (in November) given that the group had failed to meet the financial ratio benchmarks (where its total non shariah-compliant loans exceeded one-third of its total assets, according to its FY17 audited report). The anticipation has led to shariah-compliant investors taking a proactive approach heading for the exit. Once completed, management believes the shares the overhang concern will be removed given the group’s still sound fundamental. While we concur with the management’s view, we also believe that the recent share price weakness, to certain extend, could also be due to the review of the sector’s regulation landscape and the introduction of the National Fiberisation and connectivity plan, which is set to change the telecommunication operators’ capex plan and subsequently affect infrastructure providers’ (i.e. OCK) prospects moving forward.

Maintain OUTPERFORM with an unchanged DCF-driven TP of RM0.750. We made no changes to our FY18-19E earnings estimates pending the upcoming results release. Our target price is maintained at RM0.750 (WACC: 9.1%; TG: 1.5%). Stock valuations appear attractive following the 47% 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 regulations, and (iii) cash call. Key share price re- rating catalysts, meanwhile include spin-off of its towerco unit (OCK SEA towers) and earnings-accretive towerco mergers & acquisitions.

Source: Kenanga Research - 21 Nov 2018