Post OCK's results briefing, we felt reassured of our view. The contract with Numix Engineering would lift FY22/FY23 earnings more than we had initially anticipated on shorter contract duration and higher margins. We also learnt that OCK's lower margin is temporary, caused by weaker Burmese currency and one-off provisions. That said, we are cautious about the recovery profitability of future projects. While failing to win any Jendela Phase 1 tenders, OCK is in discussions with the winners to be their sub-contractors. We lowered FY21 CNP by 5% and maintain FY22E earnings, and our MARKET PERFORM call with DCF-TP of RM0.50.

RM115m contract. In Sept, Numix Engineering secured a contract from MCMC to provide broadband services in rural areas of Peninsular Malaysia. Numix has hired OCK as a contractor for the project and the RM115m contract would begin in 1QCY22, with installation taking four to six months, with two years of maintenance after. The revenue would be recognized over two and a half years (vs. our 5-year estimate), with net margins of ~8%, vs. our assumed 6%. This would contribute c.RM3.7m each in FY22 and FY23, lifting FY22E CNP by 12%.

Weakening margins. We gathered that 3QFY21 margins were especially weak because of: (i) a provision for doubtful debts in the M&E segment, (ii) provision for service-level penalty in Myanmar (due to power outage), and (iii) a volatile and depreciating Burmese Kyat which adversely affected margins. Moving forward, we do not anticipate any more such provisions. However, we are cautious on its profitability recovering given the continued volatility of the Kyat and potentially weaker margin projects.

Jendela Phase 1 tenders. OCK did not win any of the tenders. Of the 1,661 sites in Phase 1, c.600 sites for Peninsular had been awarded to 3 GLCs, and c.1,000 sites for Sabah and Sarawak had been awarded to state-linked companies. OCK is in discussions with two of the three GLC winners to be their sub-contractor. We gathered that the margins OCK would achieve from being a sub-contractor would be lower compared to directly securing the contracts.

DNB 5G rollout. Regarding concerns of a postponed 5G rollout, OCK has pointed out that Digital Nasional Berhad (DNB)’s rollout is still on track with no signs of slowing down.

Post-concall, we cut FY21E CNP by 5% on softer margins, but maintain FY22E CNP as our softer margin assumptions negate the higher earnings contribution from the Numix contract.

Maintain MP with unchanged DCF-TP of RM0.50, as we see muted prospects of earnings growth. While potential sub-contracting works from the Jendela projects could grow its TNS revenue, we remain cautious on the margins.

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

Source: Kenanga Research - 26 Nov 2021