OCK is an emerging towerco play in Malaysia with an ASEAN footprint The landmark deal with Telenor Myanmar is a major coup and couldpotentially see a USD15m uplift in lease rentals when the sites are fullycommissioned in 2017. BUY with a DCF MYR1.02 TP (from MYR1.06, 44%upside, WACC: 9.4%, TG: 1.5%) which translates into 10.5x FY17FEV/EBITDA, at a discount to the much bigger Indonesian peers for itssmaller market cap/stock liquidity. We project a commendable 35% coreearnings growth in FY16 (FY15: +49%) on:

1. Steady expansion of its site maintenance segment, and

2. Robust 3G/LTE/fiber deployments locally.

BUY. We like OCK for the strong earnings prospects of the TNS segment and its strategy to drive recurring revenues. Although we acknowledge the high earnings growth profile of the stock, we believe a cashflow valuation better captures the: i) longer-term potential of its towerco business (steady cashflows), and ii) capex needs. We estimate the leaseback deal with Telenor Myanmar would add MYR0.21 to our DCF value over the next 10 years based on the completion of 920 sites in FY17. At our valuation, OCK trades on 10.5x FY17 EV/EBITDA, at a discount to its much larger Indonesian peers. Key risks are execution, funding capability and weaker-than-expected margins.

In execution mode. The build and leaseback agreement inked with Telenor Myanmar for 920 sites in Dec 2015 marks OCK Group’s (OCK) first towerco venture overseas. We view the deal positively, given Myanmar’s sprawling towerco market where 10,000 new towers (est. 7,000 sites currently) are needed over the next two years to fulfil the population coverage targets set by the government. In addition to more tower contracts, OCK is set to benefit from recurring lease rentals over the next 12 years with higher co-locations flowing directly to its bottomline. We project a maiden lease rental contribution of USD2.5m (MYR11m) in FY16 assuming signal turn on for 150 sites in 1H16.P1 and LTE deployments to fuel telco network services (TNS) growth.OCK is the principal tower contractor for P1, (72.9% owned by Malaysia’s fixed line incumbent) which is set to rollout its LTE service in 2H16. We expect P1 to be disruptive, potentially embarking on a land grab strategy to gain mobile data share, which implies an aggressive network rollout to ensure unparalleled mobile data connectivity and experience. In addition to P1’s deployment, the strong revenue momentum from site maintenance jobs (locally and in Indonesia) and on-going mobile backhaul fiberisation by the mobile operatorswill keep the group busy over the next 12-18 months.

Looking at more. We do not rule out further towerco related M&As as management seeks to further strengthen the group’s base of recurring revenues (towerco, site maintenance and solar businesses). Based on the additional debt raised to fund its Myanmar venture, we expect the company’sgearing to rise to 1.1x by end-2016 from 0.8x in FY15.

Key Highlights Recent corporate developments

USD31m cash call was completed in Dec 2015. OCK’s paid-up capital has expanded to 792.2m shares from 528.2m following its rights issue. The rights shares came attached with 264.1m free warrants, which upon exercise would further enlarge its share base to 1.06bn. The proceeds from the 1-for-2 rights issue totalling MYR132.4m would be utilised for business expansion including potential M&As. Our forecast has assumed a fully diluted share base. Following the cash call, OCK’s major shareholder and founder/group MD, Mr Sam Ooi Chin Khoon’s stake has been diluted to 36.6% from 40.2% (assuming full dilution of warrants) while its second largest shareholder, Lembaga Tabung Angkatan Tentera (LTAT) has fallen to 12.4% (13.6% prior to the rights issue)

Landmark deal in Myanmar jumpstarts its regional towerco ambitions. In Dec 2015, OCK together with its 30% joint venture (JV) partner, King Royal Technologies (KRT) inked a master services agreement (MSA) with Telenor Myanmar for the construction of 920 sites under a build and lease model. The agreement represents a significant milestone for the group’s regional aspirations being the first tower deployment contract with a Tier-1 telco outside of Malaysia. Despite the steep upfront capex commitment (Figure. 2), we view the deal positively as: i) it would elevate OCK’s profile in Myanmar/Indo-China, the fastest growing tower market in Indo-China/South Asia, and ii) boost recurring revenues via long -term lease rentals. The agreement with Telenor Myanmar offers significant revenue scalability as OCK is committed to deploy a further 1,000 sites over a three year period. Additionally, the underlying demand for new towers in Myanmar remains strong as both Telenor Myanmar and Ooredoo (previously Qatar Telecom) are racing to meet the 85% population coverage mandated by the government by 2017. This would imply that the tower industry is in need of an additional 10,000 towers over the next 2-3 years.

TNS segment would have posted stronger growth in FY15 if not for project delays OCK’s TNS revenue surged 138% YoY to a record MYR100.5m in 4Q15. This brought FY15 TNS revenue to MYR268.8m (82% of total revenue), a 107% YoY jump, driven mainly by: i) on-going 3G/4G site deployments for domestic telcos, mobile backhaul fiberisation projects and the maiden full year contribution from 85%-owned PT Putra Mulia Telecommunications (PMT), its Indonesian site maintenance outfit acquired in 4Q14. We understand from management the TNS segment would have posted stronger growth in FY15 if not for the delays in the Phase I Universal Service Provisioning (USP) contract for the construction of towers in rural areas (awarded in late 2014) and the fiber laying project with Telecom Cambodia where some MYR40m in collective billings were deferred into FY16. The delay in the USP project was due to a review on frequency allocations by the Malaysian Communications and Multimedia Commission (MCMC) while the Cambodian contract suffered from the late handover of sites. We are positive on the outlook of OCK’s TNS segment and project revenue to grow by a FY16-FY18 CAGR of 12%, driven mainly by :  Strong pipeline of LTE deployments. We expect capex intensity among the local telcos to remain high in 2016 due to the rapid expansion of LTE sites and the ongoing network modernisation/upgrades by Celcom and Maxis. The Big-3 telcos have spent no less than MYR3bn in capex in 2015 and guided for a similar level of spending for 2016 as they look to sustain the strong momentum and demand for mobile data via an unparalleled network experience. OCK is also benefitting frommobile backhaul fiberisation projects and counts DiGi.Com (Digi) (DIGI MK, NEUTRAL, TP: MYR4.70) as a key customer. A recent meeting with Digi highlightsthe telco’s continued focus on site fiberisation after increasing its fiber footprint by 38% in 2015.

Source: RHB Research - 15 Mar 2016