OCK’s growth momentum remains strong as it aggressively pursues new contracts to leverage on 5G roll-out across the region. Meanwhile, it remains busy with various adjacent telco projects (e.g. ICT equipment supply, data center EPCC, Jendela fiberization contracts). Flushed with ample liquidity from its recent RM700m sukuk issuance, OCK has placed its Towerco listing plans on hold for now. We maintain our forecasts, TP of RM0.74 and OUTPERFORM call.

We came away from OCK’s post-results briefing feeling sanguine on its earnings traction. The key takeaways are as follows:

Eyeing more data center contracts. OCK believes there are ample opportunities to secure more EPCC contracts for data centers in the state of Johor. This is for the provision of power back-up centers including works such as power cabling, supply of generation sets etc. To recap, in 3QFY23, segmental revenue at the green energy and power segment spiked 50% QoQ - mainly from recognition of two data center contracts. Hence, OCK is eyeing more of such contracts that will add to its existing orders totalling RM25m-RM30m. As such, we believe OCK is well positioned to benefit from the brisk development of data centers at Iskandar Johor (ie. YTL Green Data Center Park, Nusajaya Tech Park, and Sedenak Tech Park).

Busy year ahead. The group has commenced the procurement process for its new RM49m eco-friendly ICT hardware contract secured in October. Hence, OCK is on track to deliver the equipment to the Ministry of Education (MoE) in late-February 2024. Moving forward, given its proven track record, OCK hopes to bag similar contracts from MoE’s annual tenders. Whilst FY23 is shaping out to be a record year, OCK is also optimistic on its prospects for next year. This is mainly underpinned by Jendela Phase 2 projects, as well as 5G roll-out contracts at Vietnam and from DNB (Digital Nasional Berhad). OCK is particularly excited on the latter, which has shared its 2024 5G roll-out plans with the group. Following DNB’s progressive 5G roll-out in 2023, the tenancy ratio at OCK’s Malaysian towers have inched up to 1.53x (2QFY23: 1.46x). This is due to increased co-location sharing with DNB at OCK’s existing 4G towers.

Bigger contracts but smaller market share at Indonesia. OCK’s market share of network-managed services at Indonesia has dwindled QoQ to circa 29%, covering 32,125 sites (2QFY23: 45%; 49,200 sites). This was because the Indonesian government has now tweaked the configuration of fresh contracts under the new round of tenders. Therefore, total contract values have now increased although the number of sites has been reduced. The increase in value is driven by enhanced job scopes, which include more ‘comprehensive and active components’. As such, this implies higher margins and hence increased profitability. OCK estimates that its total order value at Indonesia has increased by 30% YoY under this new round of tenders.

Scrapped plans to list Towerco for now. At this juncture, OCK has placed its plans to list its tower assets on the back burner. This is following the recent issuance of its RM700m Sukuk Murabahah Programme that will provide liquidity for the group to fund its growth plans. Moreover, the group believes its tower business is still at the nascent growth stage. Hence, OCK intends to expand and add more value to its portfolio before carving it out for a public listing.

Forecasts. Maintained.

We also keep our TP of RM0.73 based on 7xFY24F EV/EBITDA. This is at a discount to our valuation of 8x ascribed to Edotco, reflecting 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 4).

We continue to like OCK given that: (i) it is well positioned to benefit from JENDELA and 5G roll-out projects in Malaysia and ASEAN, (ii) it has strong earnings visibility as 55% of its top line emanates from recurring income derived mainly from telco tower maintenance and leasing contracts, and (iii) it may potentially expand to new regional markets with growth potential such as Indochina, Kalimantan and the Philippines. Maintain OUTPERFORM.

Risks to our call include: (i) unfavorable regulatory changes, (ii) delayed roll-out of 5G infrastructure, and (iii) country and political risks at frontier markets where OCK has a presence.

Source: Kenanga Research - 1 Dec 2023