OCK's 2QFY24 impairment loss on trade receivables were explained as once-off and related to certain contracts in Myanmar. Meanwhile, the group is focused on completing outstanding 5G rollout and JENDELA Phase 1 contracts. This is while awaiting the second phase of these projects to take-off. We maintain our forecasts, TP of RM0.60 and MARKET PERFORM call.

We came away from OCK’s post-results briefing feeling cautious about present prospects, but optimistic on future opportunities. The key takeaways are as follows:

Challenges at Myanmar were related to site access. OCK's one-off 2QFY24 impairment loss of RM7.6m on trade receivables stemmed from lower revenue and penalties related to certain Myanmar contracts. These contracts involved service level agreements (SLA) that outlined OCK’s obligations to procure and refuel diesel for backup power generation sets at tower sites. However, curfews and military checkpoints imposed by the current administration hindered access to certain sites. Hence, this prevented OCK from fulfilling its SLA obligations in a timely manner, resulting in revenue losses and penalties. Despite these challenges, OCK reaffirmed that it is business-as-usual for its operations in Myanmar, with strong cash flows supported by consistent monthly lease payments from clients.

Eagerly anticipating second 5G network. Given the slowdown in 5G deployment in Malaysia, OCK is currently focused on completing remaining 5G rollout contracts and addressing call-back projects from MAXIS, TM, and UMobile. While the cumulative value of these projects is lower in comparison to previous peak levels, they provide ongoing work and partially help to maintain the group’s operational momentum. Looking ahead, OCK is optimistic about replenishing its orderbook with new orders from Malaysia’s upcoming second 5G network.

Meanwhile, OCK continues to work on remaining JENDELA Phase 1 projects in East Malaysia while anticipating the announcement of Phase 2 tenders. 1HFY24 revenue contraction (-9% YoY) is partly due to a timing issue on a JENDELA Phase 1 project in Sabah that is facing delays. Nevertheless, the group’s inability to commence work and execute its contract was due to the initial contractor being slow to complete their portion and hand over the site to OCK.

Aiming big for new digital contracts. We understand that OCK’s current outstanding order book of RM440m (1QFY24: c. RM500m) comprises contracts for: (i) power backup solutions (PBS) for data centers (DC): RM41m, (ii) digital services: RM44m, (iii) recurring telecommunications network services (TNS): RM160m, (iv) non- recurring TNS: RM106m, and (v) others: RM89m. Meanwhile, it has a sizeable tender book of RM920m, which mainly comprises contract bids for digital solutions (RM560m). In particular, OCK plans to leverage on the influx of investments into DCs via current tenders for: (i) DC BPS (RM80m), and (ii) DC-to-DC fiber connectivity contracts (RM40m) in other areas outside of Johor (e.g. Klang Valley, Negeri Sembilan, Rawang).

Forecasts. Maintained.

Valuations. We also keep our TP of RM0.60 based on unchanged 6.3x FY25F EV/EBITDA. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).Maintain MARKET PERFORM.

Risks to our call include: (i) unfavorable regulatory changes, (ii) prolonged delay in roll-out of second 5G network and JENDELA Phase 2 , and (iii) country and political risks at frontier markets where OCK has a presence.

Source: Kenanga Research - 3 Sep 2024