We came away from a management teleconference call feeling assured. Covid-19 and the ensuing movement restrictions could delay 2QFY20’s pipeline build-up but we see its 2HFY20 making up for it. Sentiment on the stock could be low currently, weighed by post-rights dilution concerns, but we believe renders the risk-reward attractive. Although tweaking our earnings estimates to account for some potential weakness, and lowering our DCF-driven TP to RM0.610 (ex-rights TP: RM0.565), we raise our call to OP from MP.

Some pains from Covid-19. The group’s regional presence has not been immune to the socio-economic impacts of Covid-19. Myanmar’s tower construction pipeline is experiencing delays at the behest of key customers while the progress of Vietnam’s tower acquisitions suffered hiccups from the enforced national lockdown. Locally, contracting works were also held back as operators were limited to only performing maintenance works on their respective backhaul to ensure service quality, and application processes were being deterred.

The above would put a dent on the group’s tower portfolio expansion plan for FY20, previously earmarking an expansion of c.2,000 towers across all regions. Additionally, the group’s penetration into the Philippines market seems to be on hold.

In the 2HFY20 period, the group should see the return of telco network services as movement restriction eases and with operators re-prioritising on coverage expansion. This could rejuvenate its key managed services and tower engineering contract revenues to supplement its recurring tower leasing revenue (est. 40% of total income). On the local front, further NFCP awards in the coming months should translate favourably both directly and indirectly to the group as a tower contractor. The group also looks to enjoy savings from the lower interest rates introduced, which we reckon could translate to additional earnings of 1-2%.

Looking for a slice of LSS 4. OCK seeks to participate in the LSS (large-scale solar) 4 bids. Though it did participated in LSS 3, previously, the group had to compete against challenging price points from foreign contractors which proved uneconomical for most local players. LSS 4 is directed for greater local participation which should up OCK’s chances for a portion of the 1GW national solar energy tender. Meanwhile, the group aspires to expand its solar farm portfolio with an existing capacity of 11.24MW.

Post-update, we lower our FY20E/FY21E assumptions by 11%/3% in anticipation of some shortfalls in 2QFY20 earnings from its non-recurring income stream (i.e. engineering works). This should be made up by a lumpier 2HFY20 which typically accounts for c.60% of yearly earnings.

Upgrade to OUTPERFORM (from MARKET PERFORM) but with a lower DCF- driven TP of RM0.610 (from RM0.630). Our DCF assumptions are based on a WACC of 9.3% and TG of 1.5%. Adjusting for the dilutive effects of its proposed rights issue, our estimated an ex-rights TP of RM0.565 (from RM0.580). We believe the pending rights issue has raised dilution concerns which led to the overdone sell-down. Amidst growing uncertainties and heightening competition within the telco space, OCK’s high sustainable revenue stream (c.70%) could serve as a safe haven for investors. While no dividends are expected in the near term, we expect the stock to be sensitive to news flow from positive future developments in the NFCP, 5G and LSS4 tenders given its direct/indirect relationships. This could prove to paint a favourable risk-reward entry for the stock at current levels.

Risks to our call include: (i) slower-than-expected expansion of tower portfolios, (ii) re-imposition of lockdown on worse-than-expected second wave infections, and (iii) lower-than-expected operating margins.

Source: Kenanga Research - 30 Jul 2020