Investment Merits

• Malaysia’s leading telecommunications network services provider

• The only listed towerco in the country with a regional presence

• Strong recurring revenues from site leasing and maintenance

Company Profile

OCK Group (OCK) is the largest telecommunication service provider in Malaysia. It primarily focuses on the building and renting out of telecommunication towers with a smaller segment focusing on trading. The group is also involved in the renewable energy sector by virtue of its ownership of a 1MW solar farm in Kelantan and its participation in the feed-in-tariff (FiT) scheme administered by the Sustainable Energy Development Authority (SEDA).

Highlights

Enviable growth prospects. OCK is well positioned to capitalise on the robust growth potential in the telecommunications and towerco sector given the aggressive LTE deployments by the local mobile operators to meet data demand, network densification/optimisation projects and mobile backhaul fiberisation. We expect the increase in tower lease rentals and site maintenance revenues to drive greater recurring revenue contribution to over 35% in FY18 (FY16F: 18%).

Over 3,000 towers under its portfolio. Following the recent acquisition of Southeast Asia Telecommunication Holdings (SEATH), Vietnam’s largest independent towerco, OCK now has a portfolio of over 3,000 ground-based and roof top towers across three markets. The average tenancy ratio on its towers ranges from 1.2-1.3x. Management is looking to expand the regional towerco business, both organically (own tower builds) and via opportunistic M&As in the medium to longer term. The general trend towards the outsourcing of passive infrastructure by telcos would benefit towercos including OCK.

Company Report Card

Latest results. OCK booked its strongest ever quarterly revenue and EBITDA of MYR112.7m (+7% YoY) and MYR22.9m (+15% YoY) respectively in 4Q16, driving FY16 revenue and earnings to a record MYR407m (+29% YoY) and MYR25.8m (+5% YoY). The key growth driver remains its telco network services (TNS) segment which grew a commendable 31.4% YoY and contributed 83% to group revenue in FY16. We expect the telecommunication network services (TNS) business to post a strong revenue CAGR of 27.1% for FY16-18, underpinned by:

i. Emerging tower lease rentals in Myanmar and the recently acquired SEATH, Vietnam’s largest independent towerco;

ii. Strong pipeline of LTE network deployments in Malaysia;

iii. Fiberisation and network optimisation projects;

iv. The managed services business in Malaysia and Indonesia.

Balance sheet and cash flow. The group turned from a cash rich (zero debt) position to a slight net debt position of MYR3.5m in 3Q16, following the drawdown of a portion of the syndicated loan (totalling USD40m) to fund its capex in Myanmar. Management is targeting longer-tem gearing levels of 1-1.2x with capex to be self-funding at the towerco levels. We expect stronger operational cash flows going forward, underpinned by recurring tower lease rentals which would be utilised to defray interest cost and recurring capex. There is a natural hedge in that proceeds from lease rentals in Myanmar (for the initial three years of the master leasing agreement) are in USD, which corresponds to the USD payables (debt and capex).

ROE. The group’s ROE has fallen slightly in recent years due to the strategic move to diversify into the regional towerco space, which entails longer-term gestation and the upfront resources. We expect ROEs to show progressive improvements over the medium to longer term from the growth in site rentals and tenancies.

Dividend. OCK does not observe a formal dividend policy although we believe this could change in the near future with a greater proportion of recurring revenues from the tower leasing business. Due to the high upfront capex required for towercos, the group has been reinvesting most of its profits to grow its business. The board declared a nominal 0.6sen DPS in FY15, which translates into a dividend yield of under 1%.

Management. The company was founded by major shareholder and Group managing director, Mr Sam Ooi Chin Khoon who has more than 20 years of experience in civil works and the tower sub-contracting business. Mr Ooi continues to actively spearhead the strategic plans and growth of the company and is instrumental in driving the group’s regional towerco ambitions. OCK appointed Dr Yap Wai Khee, a telecommunications industry veteran (formerly with Axiata Group), as its CEO in 2015 tasked with overseeing the towerco business and regional forays. The management team is also represented by Mr David Low (COO) and Ms Hillary Chua (CFO).

Recommendation

We value OCK Group based on a SOP methodolgy. We apply independent discounted cashflow (DCF) valuations for its regional towerco assets and ascribe suitable P/E multiples on the domestic network contracting, green energy/power solutions and trading & maintenance segments. The DCF valuation takes into account the utility-like business of towercos, which yields a constant stream of recurring lease revenues from long-dated non-cancellable master leasing agreements with telcos. Our TP of MYR1.05 implies FY18F EV/EBITDA of 9.5x, at a fair discount to its larger towerco peers in Indonesia, which trade at 13-15x forward EV/EBITDA and the 12.5x EV/EBITDA tagged to edotco Group (wholly-owned towerco of Axiata Group) for its primary and secondary share placements exercise in January. The discount also reflects OCK’s significantly smaller market capitalisation and share liquidity. BUY.

Source: RHB Securities Research - 5 May 2017