OCK’s results beat our forecast but met consensus’ as a stronger-than-expected business pickup in the fourth quarter overcame rising costs in regional markets. We cut our FY23F earnings by 31% to reflect the elevated costs in the regional markets. Correspondingly, we lower our TP by 27% to RM0.69 (from RM0.95) but maintain our OUTPERFORM call.

FY22 earnings beat our forecast by 6% but met consensus estimate. The variance against our forecast came largely from a stronger-than expected business pickup in the fourth quarter, which more than offset rising cost pressures in the reginal markets. No dividend was declared for the year (FY21: 0.5 sen).

Results’ highlights. FY22 revenue improved by 27%, driven largely by: (i) the rising numbers of telco towers under its portfolio and management (5,300 in Malaysia, Vietnam and Myanmar), (ii) higher rental fees due to higher tenancy ratios especially in Vietnam and Myanmar, and (iii) higher contribution from its solar farms.

However, EBITDA improved by only 8% on 5ppts margin erosion to 27% on account of higher inputs and operating expenses largely in the fourth quarter in its regional markets. Its core net profit surged 33% on lower depreciation expenses especially coming in Q4.

Forecasts. We cut our FY23F earnings forecast by 31% to reflect the elevated cost pressures in the regional markets and introduce our FY24F numbers.

Correspondingly, we lower our TP by 27% to RM0.69 (from RM0.95) based on an unchanged 7x FY23F EV/EBITDA (at a discount to 9x EV/EBITDA we ascribed to Edotco to reflect OCK’s relatively smaller size). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

We continue to like OCK for: (i) the tremendous growth opportunities in the telco infrastructure space in Vietnam and Myanmar that are still relatively under-served, especially in the rural areas, (ii) it being well positioned to benefit from the Jendela initiative and 5G rollout in Malaysia with 5G population coverage to be accelerated to 80% by end of 2023, (iii) current order book of RM358m likely to expand on the 5G rollout, (iv) its earnings stability and visibility with about 62% of its revenue recurring from telco tower maintenance (55,000 towers of which about 89% are in Indonesia) and telco tower leasing, (v) 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), and (vi) potential business opportunities in other markets such as Laos (where it was awarded a towerco licence in early 2023 ) and the Philippines. Maintain OUTPERFORM.

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 - 1 Mar 2023