OCK posted a decent set of results in FY18. We continued to like OCK for its attractive growth prospects and growing recurring revenue stream. Minor tweak on FY19E numbers post the result review. Reiterated OUTPERFORM call with higher TP of RM0.650 (vs. RM0.570 previously).

In line with our expectation. FY18 CNP of RM26.7m (+8.2% YoY) came in within our (at 97%), but below consensus’ (at 91%, no thanks to the lower-than-expected revenue), full-year expectations. No dividend was declared, as expected.

YoY, FY18 revenue weakened by 7% to RM457m, mainly due to lower contribution from the telecommunication network services (“TNS”) segment (to RM390m, -8% YoY) as a result of the softer domestic sales on the back of policies' uncertainty. Despite lower turnover, its GP margin continued to improve by 200bps to 26.6% in FY18 as a result of higher number of co-locations. The higher GP margin coupled with an effective cost initiative has led its EBITDA to climb 230bps to 22.9%. To date, regional revenue contributed 38.3% of the group’s total turnover vs. 34.5% a year ago. On a recurring revenue stream basis, 47% (or RM214m) of revenue was derived on recurring basis vs. 41% a year ago. QoQ, 4Q18 turnover advanced by 23%, thanks to higher contribution from the TNS segment. EBITDA, meanwhile, improved by 10% to RM31m but with lower reported PATAMI (-11%) due to RM2.0m provision of tax for prior year taken up in 4Q18.

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) opportunities from a telco operator due to the end of its RAN sharing agreement, and (iii) outsourcing managed services trend. As at January 2019, OCK has completed and owns 930 towers in Myanmar with 1.42x tenancy ratio and more than 500 (telecommunication sites) outstanding order-book to be rolled out. On the Vietnam operation’s front, OCK owns more than 2.5k telecommunication towers to date (with tenancy ratio of 1.3x). The group has acquisition targets in the pipeline for over 1k telecommunication sites and has initiated early stages of discussion. Our earlier understanding from the management that SEATH is aiming to focus on business growth via acquisition (with a minimum criteria set at 50% EBITDA margin and 12% IRR) in FY19 with a targeted new site growth rate of 10-15% per annum and 1.5-1.6x tenancy ratio in the next five years. Any acquisition funding on its Vietnam operation is likely to come from internally generated fund and/or borrowings.

Marginally tweaked FY19E earnings by 0.2% post the results review and we introduce our FY20E earnings where we expect the group’s core PATAMI to grow by 9% YoY on the back of 11% growth in turnover.

Maintain OP with higher DCF-driven TP of RM0.650 (WACC: 10%; TG: 1.5%) post reducing our market risk premium by 0.5% to reflect the easing concern of selling pressure from the local Syariah funds. We continue to like OCK for its: (i) healthy cash-flow on the back of escalating recurring income trend, (ii) ability to ride 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 - 27 Feb 2019