We maintain our earnings forecasts, DCF-derived TP of RM0.45 and OUTPERFORM call. OCK continues to ride on the growing demand for telco towers locally, backed by the Jendela programme and an accelerated rollout of 5G with the Single Wholesale Network (SWN) model now moving closer to becoming a reality, and regionally driven by the still largely under-served markets in Indonesia, Vietnam and Myanmar.

We came away from a recent engagement with OCK feeling reassured of its prospects. The key takeaways are as follows:

1. OCK is on track to meeting its target of beefing up its telco tower portfolio by 1,100 units in FY22 comprising 800 units in Vietnam, 200 units in Malaysia and 100 units in Myanmar. While thus far in FY22 it has only completed 400 units (mostly in Vietnam), we are not perturbed as typically it only takes 3-6 months to erect a telco tower and we understand that construction pace is gathering momentum with the re-opening of economies. To, recap, OCK currently owns a total of 4,800 telco towers comprising 3,000 units in Vietnam, 1,200 units in Myanmar and 600 units in Malaysia.

2. Its tenancy ratios are stable at 1.42x, 1.33x and 1.1x in Myanmar, Vietnam and Malaysia, respectively. Typically, the tenancy ratio is lower in Malaysia than Vietnam and Myanmar as OCK is a “late- comer” in the Malaysian market, compared to being one of the first movers in Vietnam and Myanmar. Furthermore, the higher tenancy ratio in Vietnam is due to its acquisition of towers (that came with locked-in tenancies). Nonetheless, we see an uptrend in its tenancy ratio in Malaysia as 150 units of its telco towers in Malaysia have been identified for the 5G rollout in Malaysia.

3. YTD, its new telco infrastructure jobs secured stand at RM165m (vs. RM115m for full-year FY21) comprising largely telco infrastructure works under Phase 1, Jendela (expansion of 4G coverage) as well as initial works (such as site preparation) under Phase 2, Jendela (5G deployment). Looking ahead, OCK expects more telco infrastructure works to be dished out by Digital Nasional Bhd (DNB), the SPV entrusted with the rollout of 5G in Malaysia, comprising 3,000 to 4,000 5G telecommunications sites within this year itself, as well as by other mobile network operators (MNOs). We believe OCK is likely to close 2022 with new jobs in excess of the current level of RM165m.

Investment case. We like OCK for: (i) the tremendous growth opportunities in the telco infrastructure space in Vietnam and Myanmar which are still relatively under-served especially in the rural areas; (ii) being well positioned to benefit from the Jendela programme including the 5G rollout in Malaysia; (iii) its earnings stability and visibility with about three quarters of its revenue being recurring from telco tower maintenance (55,000 towers of which about 80% are in Indonesia) and telco tower leasing; and (iv) It being a proxy play to the relocation of Indonesia’s new capital city to Kalimantan in terms of telco infrastructure, given its dominant market position in Indonesia (45% market share in the telco tower maintenance space currently).

Maintain OUTPERFORM with an unchanged DF-derived TP of RM0.45 (WACC: 6.5%, TG: 1.0%), implying a FY23E EV/EBITDA of 6.5x that is at a discount to an average forward EV/EBITDA of 10.5x for its regional peers.

Risks to our call include: (i) slower-than-expected expansion of tower portfolios, (ii) lower-than-expected operating margins; and (iii)risks associated with operating in developing economies.

Source: Kenanga Research - 13 Jul 2022