OCK’s 1HFY24 results disappointed, mainly due to weaker revenue at the telco network services (TNS) segment. We believe this was likely caused by the slower network rollout of 5G in Malaysia. We cut our FY24F/FY25F earnings by 32%/28%, lowered our TP by 30% to RM0.60 (from RM0.86), and downgrade our recommendation to MARKET PERFORM from OUTPERFORM. A re-rating catalyst could be the award and accelerated rollout of contracts for the second 5G network and JENDELA Phase 2.

Likely dragged by less 5G contracts. Its 1HFY24 core net profit of RM18.9m underwhelmed, coming in at 34% and 35% of our full-year forecast and the consensus estimate, respectively. OCK declared maiden DPS for FY24 of 0.71 sen (2QFY23: nil), which was within our expectation.

The shortfall versus our forecast was mainly due to weaker-than- expected revenue from the TNS segment. We attribute this to the slowdown in the rollout of 5G sites for Malaysia's first 5G network, following the achievement of its 80% population coverage target in Dec 2023.

OCK recognized a chunky impairment loss of RM7.6m on trade receivables in 2QFY24. We deem this an exceptional non-core item as OCK rarely impairs its receivables, as evident from its strong historical track record. This stems from the stable, recurring payments it receives from major telco tenants for tower tenancy leases.

Bottomline boosted by interest savings. Weaker 1HFY24 topline (- 9% YoY) was mainly attributed to the TNS segment, likely due to sluggish 5G rollout in Malaysia, as mentioned above. Nevertheless, the decline was partly cushioned by increased trading revenues, maiden contribution from OCK’s digital segment, and higher recognition of data center-related contracts. Despite softer revenues, 1HFY24 core net profit expanded by 4% YoY, driven by lower finance costs (-19% YoY) and improved operational efficiencies.

To recap, in end-Nov 2023, OCK issued the first tranche (RM400m) of its RM700m Sukuk Murabahah program (MARC rating: AA-). Subsequently, in Jan 2024, OCK utilized the proceeds to refinance or pare down a significant portion of its USD-denominated debt. Hence, this resulted in the substantial savings on interest costs in 1HFY24.

Turning cautious as potential earnings headwinds loom. Moving forward, we are concerned that the ongoing delay in the rollout of Malaysia’s second 5G network and JENDELA Phase 2 could hinder OCK’s order book replenishment. Hence, this would result in cloudy earnings visibility, unless OCK plugs the revenue shortfall by securing other major projects swiftly. Additionally, the impairment of receivables, albeit infrequent, raises concerns about potential future risks, including: (i) impairments of its tower assets, and (ii) reduced earnings contributions if tenants default on lease payments.

Forecasts.We cut our FY24F/FY25F earnings by 32%/28% to reflect lower TNS orderbook replenishment.

Valuations. We downgrade our valuation to 6.3x FY24F EV/EBITDA (from 7x) on account of weaker earnings visibility. Our valuation represents a narrowed premium of +1SD (from +2SD) to its 4-year historical average of 5.5x. The premium is justified as it is the only pure-play Malaysian-listed tower operator that is an early beneficiary of the deployment of 5G networks in ASEAN. This is underpinned by its established market presence in Malaysia, Vietnam, Indonesia, and more recently Laos.

Correspondingly, our TP is lowered by 30% to RM0.69 (from RM0.86) and we downgrade our recommendation to MARKET PERFORM (from OUTPERFORM). A potential re-rating catalyst for OCK could be the award and accelerated rollout of contracts for the second 5G network and JENDELA Phase 2. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

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 - 2 Sep 2024