OCK’s 3QFY21 CNP of RM3.2m brought 9MFY21 CNP to RM14.4m, below our expectation at 44% of our full-year forecast. Yesterday, OCK also secured a RM115m contract to be a key contractor for Numix Engineering, which we estimate will lift FY22E CNP by 5%. Looking ahead, weakening profitability and potential 5G rollout delays could pose risks to earnings growth. We reduce FY21E/FY22E CNP by 26%/13% and downgrade our call from OP to MP with lower DCF-TP of RM0.50, mainly on concerns of weakening profitability.

9MFY21 below expectations. 3QFY21 core net profit (CNP) of RM3.2m brought 9MFY21 CNP to RM14.4m, below our/street’s expectation at 44%/46% of full-year estimate. The deviation was mainly due to the higher-than-expected costs across the board. No dividends declared, as expected.

YoY, 9MFY21 revenue grew 4%, lifted by its telecom network services (TNS) (+1% YoY) and green energy & power solution (RE) (+71% YoY) segments. The growth in TNS is attributable to OCK securing a new customer in Indonesia over the period. The growth in the green energy segment is thanks to their owning and operating of more solar farms. EBITDA grew by 2% accordingly. Despite the 6% increase in D&A charge in 9MFY21, the 17% drop in interest expense helped lift PBT by 9%. However, given higher tax expense, minority interest, and non-core items, CNP fell 26%.

QoQ, revenue rose 2% on higher TNS and trading revenues. Higher expenses and lower other incomes dragged EBITDA by 2%. Higher D&A and interest expense brought PBT down by 12% while higher tax expense and minority interest brought CNP down by 39%.

RM115m contract. Yesterday, OCK announced that Numix Engineering, a provider of satellite connectivity services, appointed OCK as the main contractor for Numix’s project called Universal Service Provider Turnkey Agreement. While the announcement did not state the duration of the RM115m contract, we conservatively estimate a 5-year period. Assuming a 6% net margin (in line with its TNS’ net margin), this contract could lift FY22E CNP by 5%, with room for upside adjustment if the contract duration is shorter-thanexpected and/or if margins are higher-than-expected.

Outlook. OCK’s TNS segment should see continued long-term growth from the need for more 5G sites. The RE segment should continue gaining traction from growth of its solar farms portfolio and from resumption in construction activity, which could boost demand for OCK’s power solutions. However, our view on OCK has been dampened by: (i) the continued decline in its profitability (with lower margins across the board, save for EBITDA), with margins weakening for three consecutive quarters, and (ii) potential delay in 5G rollout by Digital Nasional Berhad (DNB), given the prolonged negotiations between DNB and the MNOs.

Post results and accounting for the new contract, we lower our FY21E CNP by 26% and FY22E CNP by 13%. We are still expecting a seasonally stronger 4QFY21.

Downgrade to MARKET PERFORM (from OP) with lower DCF-TP of RM0.50 (from RM0.59) on the earnings cut and lower valuation, where we’ve lowered our DCF-TP from an implied 7x to 6.8x EV/FY22 EBITDA, at its 3-year mean. We think that despite potential growth in TNS from the 5G rollout and JENDELA, potential concerns on its weakening profitability could weigh on the stock.

Source: Kenanga Research - 25 Nov 2021