1QFY20 PATAMI of RM6.6m (+23%) is broadly in line with expectation, as we are anticipating seasonally stronger 2HFY earnings. OCK could be a resilient pick in the telco space given the necessity of infrastructure regardless of the impact fromthe Covid- 19 pandemic. Solid recurring income mix of 68% could also weather against risks of revenue loss from project delays. Maintain OP and DCF-driven TP of RM0.630 (WACC: 9.4%, TG: 1.5%).

1QFY20 within expectation. 1QFY20 PATAMI of RM6.6m is broadly within expectations, making up 19%/20% of our/consensus respective full-year estimates. The group typically posts a stronger 2HFY period on higher tower deployments. No dividend was declared, as expected.

YoY, 1QFY20 revenue registered at RM109.2m (+6%), supported by its key telecommunication network services (TNS) segment which grew 15% from more recurring tower leases and managed services income. The group’s operating profit, however, only grew by 2% as the group’s larger tower and solar farm base likely gave rise to depreciation charges. Subsequently, on the back of lower effective taxes of 16.4% (-1.6ppt) and minority interests, 3MFY20 PATAMI came in at RM6.6m (+23%).

QoQ, 1QFY20 top-line saw a 12% decrease from seasonally weaker performance across its key segments, especially in Malaysia. However, thanks to the similarly better effective tax rate and minority interest, 1QFY20 PATAMI only declined by 9%.

Steady does it. The group continue to hold on tight to its recurring business of tower leasing and growing portfolio of solar farms. While the telecommunications sector appears to be not immune to the adversity of Covid-19 and its economic implications, we opine that OCK is well-rooted with tower infrastructure being the backbone of the sector, regardless of the shifts in user base. Additionally, the group is set to benefit from the implementation of the NFCP in the long run, albeit with some setbacks arising from the pandemic. Meanwhile, the group’s solar farms could start to contribute more significantly, with its recently concluded acquisitions. Despite present economic slowdown, we do not discount further acquisitions in the future, in line with management’s direction to grow this segment.

Post-results, we leave our FY20E/FY21E earnings relatively unchanged.

Maintain OUTPERFORM and DCF-driven TP of RM0.630. Our TP is based on an assumed WACC of 9.4% and TG of 1.5%. This implies 6.4x FY21E EV/Fwd EBITDA, which is 1.5SD below the stock’s 3-year mean. OCK is attractive to investors seeking investment with safeguards against challenges currently posed, namely project delays, given its high recurring income mix (68% of revenue). That said, we do not foresee any dividend payments in the near-term given the group’s focus to further expanding its asset base. Though likely on hold for now due to the Covid-19 pandemic, the eventual materialisation of the group’s towerco spin-off could be a positive re-rating catalyst.

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

Source: Kenanga Research - 22 May 2020