Better-than-expected margin sustained the group’s earnings despite lower turnover in 9M18. We continued to like OCK for its attractive growth prospects and growing recurring revenue stream. Minor tweak on FY18-19E numbers, post the result review. Reiterated OUTPERFORM call with an unchanged TP of RM0.750.

Higher margin sustained growth. 9M18 CNP of RM20m came in above our (at 74%), but within consensus’ (at 68%), full-year expectations. The positive deviation from our end was mainly due to better-than-expected margin despite lower turnover. Note that, OCK’s first 9-month generally accounts for c.60-68% of full-year earnings, based on the past three years. No dividend was declared, as expected.

YoY, 9M18 revenue weakened by 8% to RM323m, mainly due to lower contribution from the telecommunication network services (“TNS”) segment (to RM293m, -17% YoY) as a result of the softer domestic sales on the back of policies' uncertainty. Despite lower turnover, its GP managed to sustain at RM90m with margin enhanced by 250bps to 27.9% as a result of a higher number of co-locations. The higher GP margin coupled with an effective cost initiative has led its EBITDA to climb 290bps to 22.9%. To date, regional revenue contributed 40.7% of the group’s total turnover vs. 35.3% a year ago. Noteworthy, the group’s Malaysia operation’s PAT improved by 6% to RM12m despite its revenue dipping by 16%. We believe the improvement was mainly due to its effective cost management (especially in the administrative expenses) that took place since July. QoQ, 3Q18 turnover was lower by 5%, no thanks to the softer contribution from the TNS segment. EBITDA, however, advanced to RM29m with margin improving to 26% (vs. 20% in the preceding quarter) as a result of lower OPEX.

Outlook. The group is set to continue benefiting from the rapid network expansion plan undertaken by various telcos in the OpCos countries. OCK is also optimistic about the new opportunities arising from: (i) the implementation of the National Fiber Optic and Connectivity plan, (ii) building and owning telco sites in various states, and (iii) outsourcing managed services trend. The group has completed and owns 870 towers in Myanmar with 1.4x tenancy ratio and 500 (telecommunication sites) outstanding order-book to be rolled out. On the Vietnam operation’s front, OCK owns more than 2.4k telecommunication towers to date (with a tenancy ratio of 1.3x). 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 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.

Maintain OP with an unchanged DCF-driven TP of RM0.750 (WACC: 9.1%; TG: 1.5%). We revised our FY18-19E earnings estimates marginally by 3-2% as the lower forecast revenues are offset by higher margin assumptions. Stock valuations appear attractive following the 48% 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 - 29 Nov 2018