1H19 earnings of RM12.3m (+32% YoY) and absence of dividends are within expectations. While we anticipate a relatively stable operating outlook, a lack of strong catalysts could leave stock sentiment soft. For now, we downgrade to MP with unchanged DCF-driven TP of RM0.630 (based on WACC: 9.5%, TG: 1.5%).

1H19 within expectations. 1H19 net earnings of RM12.3m made up 41% each of both our and consensus full-year estimates. We deem this to be in line with our expectation as the group typically register lumpier earnings in the 2H period, where more tower construction projects are recognised. No dividend was declared, as expected.

YoY, 1H19 revenue increased by 3% to RM219.3m. This was on the back of larger trading and M&E engineering services contributions. The lion’s share telecommunications network services (TNS) segment experienced a 4% decline in sales, which we believe could be due to slower tower construction deliveries, as leasing revenue is usually stable. While PBT improved marginally by 2% to RM17.9m, core PATAMI registered at RM12.3m, 32% higher, thanks to lower share of minority stakeholders.

QoQ, 2Q19 sales rose by 12% from higher TNS and M&E engineering service revenues. Operating margin remained relatively stable, translating to 2Q19 net earnings of RM7.0m (+31%).

Sprouting about. Even with YTD tower portfolio of 4k, the group looks to continue expanding its footprint. Malaysia should see growing needs from the implementation of the National Fibre Optic and Connectivity Plan (NFCP). Meanwhile, Myanmar is fuelled an outstanding orderbook of more than 500 sites. Additionally, 4G LTE opportunities could soon dawn in Vietnam. Given the fragmented nature of Vietnam’s towerco ecosystem, an industry consolidation may not be too far-fetched, possibly to the benefit of OCK. On another note, recent rounds from the LSS 3 tender could boost the group’s Green Energy segment. However, the segment currently contributes less than 10% to revenue and PBT.

Post-results, we made minor tweaks to our FY19E/FY20E numbers as we incorporate 2Q19’s results numbers.

Downgrade to MARKET PERFORM (from OUTPERFORM) with an unchanged DCF-driven TP of RM0.630. Our target price (based on WACC: 9.5%, TG: 1.5%) implies an EV/Fwd. EBITDA of 7.2x against our FY20E earnings, which is close to the stock’s -1.5SD over 3-year mean. At present, the lack of meaningful developments could leave sentiment at uninspiring levels, despite the group still continuing to demonstrate stable results. It is possible that investors are still holding their breath on further news-flows on the potential spin-off of its towerco unit (OCK SEA towers). At the meantime, prospective acquisition opportunities (i.e. Vietnam) would be a positive re-rating to the group.

Risks to our call include: (i) faster/slower-than-expected expansion of tower portfolios; (ii) higher/lower-than-expected operating margins.

Source: Kenanga Research - 29 Aug 2019