We  initiate coverage on OCK with a BUY rating and a FV of MYR1.65.We see strong growth opportunities for the group in the leasing of telco sites,  which,  along  with  its  growing  green  energy  business,  offers steady recurring income. Management is also pursuing growth outside of Malaysia, both organically and inorganically. OCK could see a boost to its profile upon transferring to the Main Market in 4Q14.®  About OCK. OCK Group (OCK) is principally involved in the provision of telecommunications  network  services.  The  group  has  diversified  its business  into  renewable  energy,  and  intends  to  build  up  its  recurring revenue base mainly from leasing telco sites and selling solar energy.®  Building  for growth. Management  sees plenty of growth opportunities as a telco site owner. OCK now owns 240 telco sites and is targeting 300 telco  sites  by  year-end.  Going  forward,  we  think Telekom  Malaysia  (T MK, NEUTRAL, FV: MYR6.10) (TM)’s entry into P1 (TM intends to invest MYR1bn in P1 for long-term evolution (LTE) rollout) is positive for OCK.

• Diversifying  into  site  maintenance. The  group  is  also  looking  to capture  a  slice  of  the  telco  site  maintenance  market  that  also  offers recurring  revenue.  The  proposed  acquisition  of  PT  Putra  Mulia Telecommunication (PMT)  should  give OCK  exposure  to  the  fast growing tower market in Indonesia.
• Beneficiary of Budget 2014. We understand that it is keen for a slice of the 1,000 telco sites announced by the Government during Budget 2014. While  we  expect  bidding  to  be  competitive, OCK  is  a  Tier-1  player  in providing telco network services, and has a solid track record.
• Green  energy.  It  is  keenly  looking  out  for  more  engineering, procurement  and  construction  (EPC)  projects  related to  solar  plants. Besides that, it has been producing solar energy since Oct 2013 with its maiden 1-megawatt (MW) solar plant  in Kelantan.  In the medium term, OCK is targeting to generate 30MW worth of solar energy.
• Forecasts. We forecast OCK’s net profit to grow at a CAGR of 52% from FY13-15,  on  the  back  of  strong  revenue  growth  in  its  traditional telecommunication  network services through  new contracts for  network deployment  and  contracting  work  for  building  telco universal service provision (USP)-related sites. However, we  note  that  its  EPS  will  be diluted by recent new equity issued.

Company Background

OCK  Group  (OCK)  is  principally  involved  in  the  provision  of  telecommunications network  services.  Among  other things,  this  mainly  encompasses  network  planning, network deployment  and network operations  &  maintenance  for  the  local  mobileoperators such as Maxis (MAXIS MK, SELL, FV: MYR6.00), Celcom (wholly-owned subsidiary of  Axiata Group (AXIATA MK, NEUTRAL, FV: MYR6.85) and DiGi (DIGI MK, BUY, FV: MYR6.20).

The  contracts  for  network  deployment  services have  been awarded  either  through telecommunications  technology  providers  (such  as  Ericsson (ERIC  US,  NR) andAlcatel-Lucent (ALALF US, NR) or directly – as was the case with DiGi. Over the years, OCK has diversified its business into trading of telecommunications network equipment and materials, enterprise network security solutions and provision of green energy and power solutions.

Sam Ooi Chin Khoon, its MD, is the largest shareholder of OCK and responsible for the  growth,  development  and  strategic  direction  of  the  group.  He has  an  indirect ownership  in OCK via  Aliran  Armada SB, which holds a 45% direct equity stake in OCK. Lembaga Tabung Angkatan Tentera (LTAT) is the second largest shareholder of  the  company  with  an 11.8% equity stake. David  Low  Hock  Keong (2.3%  equity stake)  is  the  executive director  and  group  COO,  supervising  its  overall  daily operations.

Corporate Exercises

OCK  is  currently  listed  on  the  ACE  Market.  Having  fulfilled  the  necessary requirements, it is expected to transfer to the Main Market in 4Q14, which could be a boost to the group’s profile and investability.

Together with  its  proposed  transfer  to  the  Main  Market,  OCK  also  announced  a bonus issue of up to 177,076,363 bonus shares (on the basis of one bonus share for every  two existing  OCK shares  held).  Management  also  expects  the  bonus  issue exercise to be completed in 4Q14. The  group had also  announced  two  equity  fundraising  exercises  to  finance  its expansion  plans.  Management  expects these  exercises  to  be  completed  by  3Q14, and thus should not affect FY14 EPS too significantly, although it could have a fullyear dilution impact on its FY15 EPS.The  first  equity  fund  raising  exercise was  completed  this  month,  which involved  a private placement of 20% of OCK’s share capital. While this exercise was broken into two tranches, the issue price and the amount of new shares  issued were similar at MYR1.30  and  28,490,000  placement  shares  respectively.  As  a  result,  OCK  raised gross proceeds of MYR74.1m.

Besides that, OCK is currently in the process of acquiring PMT for MYR21.25m, to be paid via a combination of MYR10m cash and issuance of 10.2m new OCK shares (to satisfy  the  remaining  purchase  consideration  of MYR11.2m). Management  expects this exercise to be completed by 3Q14.The potential enlargement of OCK’s share capital and dilution to its EPS are shown in the Valuation & Recommendation section.

Business segments 

The  main  revenue  driver. OCK  derives  the  bulk  of  its  revenue  from  providingtelecommunication network services, which made up 57% of its FY13 revenue. Mos of  the  revenue  from  providing  telecommunication  network  services  still  come  from their traditional business of providing turnkey solutions (as seen below) for either the mobile operators themselves or through the telecommunication technology providers that  ultimately  serve  the  mobile  operators. OCK  has  completed  work  for  majo players such as DiGi, U Mobile, Maxis, Celcom, Ericsson, ZTE (ZTCOF US, NR) and Alcatel Lucent.

At  the  network  design  stage,  OCK  will  work  closely  with  either  the  client  (mobile operator or telecommunication  technology  provider)  to ensure  that the  network  will achieve  optimum  coverage  in  width  and  depth.  Once  the  network  plans  are confirmed,  OCK  will  then  embark  on  the  network  build  phase  and  procure  the necessary  materials  (these include  telecommunications  equipment  and  hardware). Once the network is deployed, OCK provides network maintenance, which involves providing support to maintain and troubleshoot all critical network elements.

We believe there are opportunities for more  network deployment contracts as the mobile operators  are  still  in  early  stages  of  rolling  out  4G  services.  In  fact,  we  expect  all  the mobile operators to spend more capex in 2014.

The first small but growing recurring revenue stream (we estimate roughly 10% of thetelecommunication network services revenue) is the business of owning and leasingout telecommunication sites (towers and rooftop structures) as a telecommunicationsinfrastructure owner, ie being an independent tower company (ITC). OCK has seensuccess since embarking on this strategy upon securing the Network Facility Provider (NFP)  license  from  the  regulator,  Malaysian  Communications  and  Multimedia Commission (MCMC) in Nov 2011. Starting from scratch following the award of the NFP license, OCK now has 240 sites achieved both via build-to-suit and acquisitions.

Moving  up  with  solar  energy. OCK’s  green  energy  and  power  solutions  (GEPS) division is  traditionally  involved  in supplying  power  generation  equipment  including engine-generators,  transformers  and  other  related  equipment  used  as  back-up electricity generators for commercial, retail and factory buildings. The GEPS segment is the second largest driver to OCK’s revenue, contributing 29% of FY13’s revenue. Recognising  the  potential  of  renewable  energy,  management intends  to  gradually build a second recurring income base by selling solar energy through the FiT (Feedin-Tariff) scheme in Malaysia. Nonetheless, given OCK’s background as a contractor, the group continues to offer EPC work for solar farms.

Trading business  will  remain  a  small  contributor.  OCK  also  trades  in telecommunications  hardware  and  installation  materials  such  as  antennas,  feeder cables, connectors and water proofing tapes. Overall, its trading unit contributed 7% to  the  group’s  FY13  revenue. The  group  leverages  on  its  relationships  with telecommunications  technology  providers  such  as  Ericsson  and  ZTE  and  mobile operators like  DiGi,  which  makes  it  easier  to  introduce  its  product  offerings  for implementation together with their network equipment. Besides  that,  OCK  also  trades  in IT  security  products  that  cater  the  enterprise industry, like Giritech (virtual private network (VPN) solutions), Ironkey (secure data and online access solution) and Rapid7 (threat management solutions).

M&E  engineering  services will  also  remain  a  small  business. Mechanical  and electrical  (M&E)  engineering  services  (7%  of  FY13  group  revenue)  are  needed  for deployment and turnkey services, ie mainly for the construction of the network sites. In  addition,  the  group  offers  M&E  engineering  services  on a sub-contract  basis, in collaboration with other construction companies for the development of commercial buildings, healthcare institutions and other types of buildings during off-peak periods. Besides providing M&E works for telecommunication towers, OCK also provides such services  to  the  construction  sector.  Through its  partnerships  with  construction companies, it has been able to win projects on a sub-contracted basis.

Key Investment Themes

Building  for growth. Management  sees  plenty  of  growth  opportunities  as  an  ITC.OCK now  has 240 telco sites (mainly rooftops relative to towers) achieved via bothbuild-to-suit and acquisitions. Management expects to have 300 telco sites by yearend, which we believe will be driven by the  incumbent mobile operators’ continuous efforts to expand or fill in gaps in their 3G coverage. Prior to TM entering the picture, Packet One (P1), which is a WiMAX operator, had seen  its  WiMAX  rollout  moderate  significantly  in  the  last  four  quarters – which  is unsurprising, given  the  capital-intensive  nature  of  the  business  amid  its  continuing struggles  to  turn  profitable  (P1  recorded  an  unaudited  loss  of  MYR133m  in  FY13). P1’s current WiMAX population coverage is 50%.

Source: RHB