A recent meeting with management suggests that OCK is on track to meet our FY15 projections while our FY16 estimates appear conservative should major M&As materialise over the next few months. Maintain BUY and MYR1.06 TP (35% upside). The key risk remains a potential cash call. Investors should, however, adopt a slightly longer-term view given the attractive regional towerco proposition, which will allow the group to scale up and drive a new leg of earnings.

An ASEAN towerco in the making. OCK is positioning itself to be an independent ASEAN tower company (towerco) in the longer-term. We gather from management it is finalising sizeable deals, both locally and in Indochina that are set to be its major ‘breaks’ into the towerco space. The group currently owns over 100 tower sites in Malaysia and is in talks with a major Tier-1 telco for the sale and leaseback of the majority of its sites. The targeted M&As in the region could potentially boost the number of sites owned to over 4,000, making OCK the biggest listed independent towerco in Malaysia. In comparison, edotCo, Axiata’s (AXIATA MK, NEUTRAL, TP: MYR7.20) wholly-owned towerco, has over 12,000 sites which are largely made up of its parent’s regional mobile sites across Malaysia, Sri Lanka, Bangladesh, Cambodia and Pakistan.

Strong pipelines. OCK expects its billing momentum to ramp up over the next few quarters (following a seasonally slow 1Q15) from site installations (LTE deployments/Phase 1 of the Universal Service Provisioning (USP) contract), fiberisation works and completion of the USD7m fibre-laying contract in Cambodia by end-2015. It remains a front-runner for the USP Phase II contract.

Key risks. The capacity to fund significant M&As (a cash call is not ruled out) remains a key risk and could cap sentiment on the stock in addition to delays in contract awards and lower-than-expected margins derived from its key telco network services (TNS) segment.

Maintain BUY. Our TP is based on fair 16x 2016F EPS, supported by the more than doubling in projected core earnings for 2015 and a PEG of 0.3. The ventures into the regional towerco space are not without execution risks but opportunistic in our view to drive the next leg of earnings growth and strengthen the group’s base of recurring revenues. Our forecasts have yet to factor in any regional towerco M&As and/or contract wins. Hence, FY16 numbers appear conservative.

Key Highlights

Crafting a regional towerco OCK is honing in on the Indochina market, a thriving socioeconomic region enjoying strong mobile revenue growth from rising mobile internet and smartphone adoption. While talks of its expansion into the Myanmar towerco market are not new, a recent meeting with management revealed that it is exploring a few notable M&As in two key markets. The deals, if they materialise, would accelerate the group’s transformation into a leading towerco player in ASEAN and possibly the first involving a listed Malaysia-based telco infrastructure services group. Note that OCK already has a strategic presence in Cambodia, Vietnam and Laos by virtue of various fiberisation jobs, consultancy/engineering services rendered and the supply of telco-related equipment. The allure of Myanmar The strong prospects within the towerco segment in Myanmar have attracted a slew of investments by independent tower companies (ITC) over the past two years. There are currently six ITC in the market (see Figure 1) – Myanmar Tower Company (MTC), Apollo Towers, Irrawaddy Green Towers (IGT), Pan Asia Towers (PAT), Eco-Friendly Towers (EFT) and Myanmar Infrastructure Group (MIG). The ITC are servicing the internal needs of Telenor (TEL NO, NR) and Ooredoo (ORDS UH, NR), which have committed to rolling out more than 10,000 towers over the next two years to expand mobile coverage in the country. With the exception of EFT and MIG, the other ITC are made up of consortiums comprising foreign towercos, strategic investors and private equity funds. OCK’s 70:30 joint venture with Myanmar Integrated Networks (OCK-MIN), formed in early 2015, is awaiting the award of the Network Facilities Service Class licence by the Myanmar Government and could emerge as the first Malaysian greenfield towerco in the country.

According to industry-related reports in Myanmar, the ITC have, to date, deployed some 5,000 sites under Phase 1 & 2 of the network rollouts by Telenor and Ooredoo, mainly centred in the key cities of Yangon, Mandalay and Nay Pyi Taw (estimated population coverage of 40-50%). The towerco market, however, remains underserved given the estimated 17,000 sites required to attain the 70% population target set forth by the Government by 2017. We think this presents a good opportunity for new entrants to come into the market, including OCK. The orders for new towers in Phase 3 are in the more rural and remote areas of the country and spread across a bigger base of towercos servicing different regions and clusters. We understand from industry sources that new tower construction contracts under Phase 3 were awarded to Apollo Towers, MIG, IGT and EFT involving some 3,000 sites. More recently, the Myanmar Times reported that MTC, which is owned by Digicel Group and Yoma Strategic Holdings, has put up its towerco assets and lease contracts for sale. We do not discount the possibility of OCK gaining a quicker access into the Myanmar towerco market via inorganic means. However, it is likely to face stiff competition from existing players and new towercos. We think another market which is seeing the opening up of its towerco industry is Vietnam, where less than 10% of its estimated 57,000 towers are currently held by ITC.

While we are positive on OCK’s regional towerco ambitions to drive a strong base of recurring revenues and generate steady earnings growth in the longer term, there remain concerns on the group’s ability to stomach sizeable deals, execution and funding-related risks. Using the recently-concluded sale and leaseback agreement inked between Singapore Windsor Holdings Ltd (SOR SP, NR) and MIG for the construction of 500 towers valued at USD39m (USD78,000 per site), the proposed investment in a brownfield towerco in Myanmar could be in excess of USD100m (MYR380m) for 1,000 sites.

Eyeing more local tower leasing and site maintenance jobs OCK continues to be in talks with local mobile operators on the sale and leaseback of tower sites (revenues parked under the TNS segment). It targets to add 200 towers in FY15 and is in fairly advanced negotiations with a Tier-1 operator for the leaseback of sites to be constructed. We expect the company to be a principal contractor for the deployment of sites by P1 (55.3%-owned subsidiary of Telekom Malaysia (T MK, NEUTRAL, TP: MYR7.40), which is expected to roll out its converged mobile product in 4Q15. Our industry checks indicate that P1 intends to front-load its capex and is looking to add some 2,000-3,000 sites over the next 12 months, following the recent appointment of a network vendor.

Following the maiden maintenance contract inked with Maxis (MAXIS MK, NEUTRAL, TP: MYR6.50) in 2014 for 4,300 sites in the Peninsula, management believes that other mobile operators could follow suit to outsource the maintenance of their networks due to significant opex savings and the margin pressure from the structural decline in industry revenues. OCK had earlier guided for revenue from the local site maintenance jobs to double in FY15, driven largely by the full contribution of the Maxis contract.

We expect the group to be one of the leading contenders for Phase II of the USP contract for the construction of new towers in rural areas announced in Budget 2014. Of the total 400 sites awarded under Phase I in 4Q14, OCK secured 30 sites, mostly located in the East Coast. We understand the bulk of the billings from the Phase I contract will be recognised in 2H15 due to delays in the construction process following the East Coast floods at the start of the year. OCK has tendered for about MYR700m worth of sites under the Phase 2 & 3 USP projects (including maintenance) involving some 300 sites. We expect the Malaysian Communications and Multimedia Commission (MCMC) to announce the winners of the tender exercise in the next few months.

PMT on a roll OCK will see the full-year contribution from its 85%-owned Indonesian site maintenance outfit, PT Putra Mulia Telecommunication (PMT) in FY15. PMT posted revenue and net profit of MYR18.5m and MYR4m respectively in FY14, and continues to benefit from the rising trend among mobile operators for the outsourcing of site maintenance. PMT’s existing customers include Hutchison 3 Indonesia (H3I), XL Axiata (EXCL IJ, BUY, TP: IDR5,100), Tower Bersama Infrastructure (TBIG IJ, NEUTRAL, TP: IDR9,700) and Protelindo. Management is targeting some 20,000 sites by end-2015 from over 14,000 sites under management to-date. We project PMT’s FY15 revenue to near double YoY, underpinned by the steady expansion of telco sites under maintenance and the relatively attractive gross margin of 30%.

Renewable energy (RE) business likely to see steady contributions OCK remains on the lookout for sizeable engineering, procurement and construction (EPC) solar farm jobs (typically tendered out/assigned by the Government). It is, nonetheless, selective on the type of solar farm projects and is prepared to walk away from deals with internal rate of return (IRR) of less than 10%. OCK does have an enviable track record of constructing solar farms (10MW farm in KLIA was completed within six months), which positions the group well to secure additional mid- to large-scale projects that may be up for grabs, given the Government’s aspiration to increase generation capacity from RE sources. We expect the revenue and earnings contributions from its green energy and power distribution business to be driven by the additional 1.15MW generated under the Feed-in-Tariff (FiT) scheme granted by the Sustainable Energy Development Authority (SEDA), where the rights to the sites had been assigned to OCK. This is in addition to its 1MW solar farm in Kelantan, which generates recurring revenue of MYR1.4m pa based on an attractive FiT tariff of MYR1.04 kilowatt/hour (kw/h).

Funding Given its strong appetite for regional expansion, we expect OCK to gear up its balance sheet which is currently in a slight net debt position of MYR11m as at 1Q15 (net gearing of 0.05x). Additionally, we do not rule out a potential cash call to maximise its funding capacity and to ensure sufficient headroom for strategic and opportunistic acquisitions. The company had earlier drawn down about MYR4m of its Islamic debt facility of MYR150m with the remainder earmarked for local towerco M&As. Assuming a target net gearing of up to 1.2x, OCK could raise up to MYR600m for inorganic expansion. The gearing level is still lower than that of the Indonesian towercos, which typically hovers at over 3x.

Forecast and risks We make no changes to our forecast at this juncture. There is upside risk to our FY16F revenue and earnings should M&A deals come to pass over the next few quarters. Our projections have yet to reflect contributions from the USP Phase 2 & 3 projects. Some of the major risks that could impact our earnings forecasts and view on the stock include: i) delays in project execution and award of contracts, ii) higher-than-expected costs resulting in lower margins for certain projects, iii) execution of potential M&A deals, and iv) a potentially-dilutive fund-raising exercise. Valuation and recommendation We keep our BUY rating premised on an unchanged TP of MYR1.06 (16x P/E on FY16 EPS). In our view, the valuations on the stock are fair and supported by the commendable EPS CAGR of 47% for FY14-17, which translates into a PEG of 0.3. At current levels, OCK trades at 12x FY16F EPS and 9.9x FY16 EV/EBITDA, lower than the respective comparables of 23x and 12.6x for Malaysian telcos. The discount reflect its smaller earnings base, market capitalisation and stock liquidity.

Financial Exhibits

Financial Exhibits

OCK intends to broaden its recurring revenue base via the focus on site maintenance, tower leasing revenues and solar farm concessions

Company Profile

OCK is the largest telecommunication service provider in Malaysia. It primarily focuses on the building and renting out of telecommunication towers. It also has a smaller segment focusing on solar energy.

Recommendation Chart

Source: RHB Research - 9 Jul 2015