ADDING OCK-WA INTO THE PORTFOLIO by KENANGA

This is the report by Kenanga dated 5 May 2016, when the price of OCK-WA was 18sen.  Kenanga has a TP (fair value) of the warrant at 44 sen and the mother share at 95 sen.  OCK was closed at 79.5 sen that day.

ANALYSTS' TARGET PRICE FOR ONE YEAR ONLY (by 1H2017)

Below are the summary of analysts' research report on the fair value or target price of OCK, as shown in OCK Group website.

OCK         Report date           Ref. Price         Target Price

RHB        15/3/16                  71 sen               102 sen

RHB         08/6/16                 82 sen               100 sen

Kenanga   26/5/16                81 sen                95 sen

Inter Pac   26/5/16                 81 sen               93 sen

Malacca    31/5/16                 80.5 sen            100 sen

OCK-WA   

Kenanga   5/5/16                  18 sen                  44 sen

TAKE ANALYSTS' REPORT WITH A PINCH OF SALT

While credit should be given to those analysts who could uncover great gem from the Bursa range of stocks, it is also advisable to use it as a reference, with a pinch of salt.

While investors may have different views or opinion about the biz, partly it could be due to different reasons or assumptions.  For example, if investors looking at the this stock for a period of 3-5 years, hence, one must add in the 

(a) NPV of the remaining 2,000 towers to be built in Myanmar

(b) NPV of the forthcoming acquisition of brownfield towers in Indochina (still awaiting more info to estimate the value, but it can contribute immediately since it is a brownfield project.

(c) Assumption of warrants are converted into shares

Besides the different assumptions above, mainly due to different time horizon, hence, there are more value to an investor if their horizon is much longer than the analyst (typically one year)

Of course, there are also many other different assumptions need to be refined, such as currency rate, price of steel, or any other major factors that could effect the value of the company.

SO, WHAT IS THE VALUE (IF) WE LOOK AT 3-5 YEARS HORIZON

Theorectically speaking, we should add in (a), (b) and (c) above.  Since, most analysts gave the 920 towers a NPV value of about 20 sen, we can also use 20 sen as reference value for 1000 towers.

(a) additional value for 2,000 towers          =           40 sen (reference to analysts)

(c) additional value for brownfield towers   =           10 sen (estimates)

(c) if warrant converted                              =            11 sen (assume RM175m of warrant conversion used for Myanmar)

Total value of OCK at 2020 is about = 100 (analyst TP) + 61 sen = 161 sen.  

Doubling your price in 4.5 years from 80 sen to 161 sen in 2020.

What about OCK-warrant?

A simple calculation is, 161 sen less exercise price 71 sen = 90 sen.

If you buy today, say at 24 sen, in 4.5 years time, you will get about 66 sen capital gain.  When I first discussed about the warrant, it was at 16 sen (in Dec 2015).

Few milestones have materialised as follows:

Dec 2015         Rights issue completed + Myanmar Telenor agreement signed

May 2016          Quarterly result and Annual Report is out

June 2016        Private Placement about RM64 million announced and investment in brownfield in Indochina also mentioned

So, fundamentally, the price before Dec 15 and today should reflect the milestones above.  

IT'S JUST A THEORY, A STOCK THEORY.

DISCLAIMER

This is just an idea, not a recommendation to buy, sell or hold.  

LUCKY FOR THOSE LATE READERS (AFTER 5,000 and 21 JUNE 2016) - UPDATE

The Group market cap is RM650m

Less:                                  RM300m (net cash + trade debtors)

If you buy the entire Group today, say you pay RM650m, you can get back RM300 m cash.  So, you are actually paying RM350m for its existing biz (making profit about RM25-35m)

You may ask, what is the RM300m do then? Plus, June private placement of about say RM70m do then?

1.  they have to complete 920m towers for about RM300m on a build and leaseback (>10 years).  Likely they will gear up 60%.

2.  they have the option to build remaining 2,000 within 2017-2020 (for about RM650m).  Hence, it also need equity and loan.  By then, they may get some cash flow from the 920m towers lease rental income.  Since it is spread over 4 years, they need about only RM160m p.a.  Hence, if their equity debt ratio is 40:60, they need only about RM60m cash each year.  So, this RM300m cash + cash flow from 920 towers comes in just nice + some from private placement announced in June 2016.

3.  As for the private placement, we assumed they can raise about RM70m.  Substantially will be used to buy brownfield towers in Vietnam, which provide a ROE of about 15-18% (assume equity debt ratio of 30:70).

4.  Analysts estimates, item 2 and 3, will provide a NPV of RM600m over next 10 years.

5.  An estimates of item 3, NPV would be about RM120m over next 10 years.

6.  What you are paying today, is the existing biz RM350m + RM300 cash.  You are getting a group from a sustainable earnings of 20% to almost 65% in next few years.  On top of that, your EBITDA/EV is less than 10x.  EBITDA is said to be around 60%.  So, the company ROE will be enhanced over the next few years.  Cash flow will improved as well, especially after they pay down the loan.  (I have not mentioned about their other biz here).