9MFY19 net profit of RM20.8m (+22% YoY) and absence of dividends are within expectations. Outlook should remain stable, being supported by the NFCP. Funds raised from a recent placement could fuel the group’s endeavors to expand its green energy assets. However, owing to the ensuing share dilution, we reduce our TP to RM0.585 (from RM0.630) on unchanged DCF assumptions (WACC: 9.5%, TG: 1.5%). Maintain MARKET PERFORM.

9MFY19 within expectations. 9MFY19 net earnings of RM20.8m accounted for 75% and 77% of our and consensus full-year estimates, which we deem to be within. No dividend was declared, also as expected.

YoY, 9MFY19 revenue improved to RM350.4m (+8%), mainly driven by greater income from M&E engineering service contributions, cushioning the decline from the green energy and power solutions segment and trading business. The telecommunications network services (TNS) segment inched up by 3% on more tower projects. Consequently, PBT narrowed by 10%, mostly the result of lower TNS’ PBT margin, likely on higher running costs. 9MFY19 PATAMI closed at RM20.8m (+22%) thanks to lower effective taxes and minority interests.

QoQ, 3QFY19 sales increased by 13% following better activities in the TNS segment, which usually kicks in during the 2HFY period. Subsequent to this, PBT and PATAMI rose to RM11.5m (+19%) and RM8.5m (+22%), respectively.

Planting green alternatives. With RM52.3m raised from the completion of the recent placement (87.1m shares issues at RM0.600 per piece) in early Nov 2019, the group is embarking to acquire more solar farms to boost its existing portfolio. At present, the segment currently contributes less than 10% to revenue and PBT. This would serve the group well to diversify its operations with the group seeking to unlock value from its towerco unit (OCK SEA Towers) through a potential spin-off. Putting this aside, OCK is positioned to benefit from the 5-year National Fiberisation and Connectivity Plan (NFCP), with telco towers and fibre optic networks being the back bone to drive connectivity.

Post-results, we leave our FY19E/FY20E assumptions unchanged.

Maintain MARKET PERFORM but with a lower DCF-driven TP of RM0.585 (from RM0.630). Though we largely maintain our DCF assumptions on the back of a WACC of 9.5% and TG of 1.5%, our reduced TP comes in part from the share dilution arising from the shares placement. The group should continue to operate in a stable and sustainable operating environment, but may have seen its merits already being priced in at current share price level. Excitement would probably emerge from more solid developments on the monetisation of OCK SEA Towers. At the meantime, the lack of dividend expectations may also leave investors wanting more.

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

Source: Kenanga Research - 22 Nov 2019