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SOS Will OCK be the last Jedi? 2017 Final Part

sosfinance
Publish date: Thu, 21 Dec 2017, 02:56 PM
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VALUATION DOES NOT DETERMINE THE PRICE, IT'S JUST A TOOL TO ESTIMATE A VALUE OF A BIZ

www.sosfinancialplanning.blogspot.my

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.....IS THIS ARTICLE FAKE OR FACT?? ANYONE CAN CONFIRM?
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WHY OCK GROUP SHARE PRICE NOT PERFORMING?

It is very hard to predict the share price.  Even using technical analysis, the success rate on predicting the movements of share price are limited.  In the short run, the share price may not reflect the valuations, hence, they are many over valued or under valued stocks.

 

WHY NOT MANY CAN SUBSCRIBE TO VALUE INVESTING PRINCIPLE?

Mainly because of their own temprement.  Their expectations is focus on the share price (in the short run) while their selection is based on estimated valuations (for long term - for me 3-5 years), hence, expecting the share price to reflect the valuation immediately is not rationale - hence, cause the frustrations. 

In reality, we have to accept this principle, else, it should not be called value investing:

"The father of value investing, Benjamin Graham, explained this concept by saying that in the short run, the market is like a voting machine--tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine--assessing the substance of a company.

The message is clear: What matters in the long run is a company's actual underlying business performance and not the investing public's fickle opinion about its prospects in the short run."

 
RECENTLY, WHY SO MANY FRUSTRATED PLAYERS?
 
Because, the players expectations (of their under valued stocks) and the stock price move in opposite directions, except for some popular stocks.
 
One of the many, I like to discuss is OCK Group.
 
 
WHY OCK FUNDAMENTAL IMPROVES WHILE SHARE PRICE DROPPED?
 
1.  Again, it may be pointless for me to explain the reasons for the share price movements.  It could be liquidity, it could be different perceptions (high PE, low ROE), it could be sector issues, it could be "unpopular" for the short run, etc.
 
2.  I like to briefly explain why the high PE and the low ROE, so we can appreciate this counter slightly better.
 
3.  PE of 30x - crazy isn't it? It is because it raised about RM200m equity in 2016, their investments (in tower business) is still in progress and have not fully yield its maximum upside.  There is some similarity with other infrastructure projects, such as toll roads, IPPs, water concessions, or even plantations, there is no earning yields for the first 3 years because of construction in progress.
 
Estimate of PE (non-tower sector)
 
Market Capitalisation:  RM785 million @ 90 sen per share
 
(Extract from research report, the most conservatives one)
 
                   2016    2017    2018
EBITDA       60m    99m     120m
 
By End of 2018, increase of EBITDA is about RM60m.
Assumed 90% is contributed by tower biz, increase = RM54m
 
(a)  Tower sector valuation (accepted by market, EBITDA multiple) = RM54 x 10x = RM540m (this is about 2.7x of equity injection - just for reference, not comparison, SILK sold to PNB for about 3x its equity injection) and Ekovest sold to EPF at about 5x of its equity injected  (RM2.8b/555m).  It is norm, infastructure's project IRR ranges from 10-15%.  Equity IRR will be 2-3% higher.
 
For reference only:
 
                         Market Capitalisation/Equity Injected
 
SILK                 3x  (sold to PNB)
Ekovest            5x  (sold to EPF)
Litrak                9x  (market traded)
OCK                  2.7x (estimates only)
 
 
(b)  Non Tower Sector valuation = RM785m - RM540m = RM245m (Earnings is about RM28m), therefore PE = 245/28 = about 8.75x
 
Therefore the PE (for non-tower sector) = PE of 9X
 
So, using PE for the entire business is "misleadin"g. (It is like a Construction company, just diversified into toll roads concessionaire, you must split it into two seperate sectors to estimates its value).
 
4.  Why the ROE is so low?  Similarly, the Shareholders Funds (without the Tower sector) is RM236m (RM436m - RM200m).
 
ROE should only be calculated on the non-tower biz = about RM28m/ RM236m = 12%.  Hence, the ROE is not too bad.
 
5.  The above is merely an estimates of the valuation.
 
SO, WHAT IS THE UPSIDE OF OCK BASED ON THE FOLLOWING "FUNDAMENTAL" NOT POPULARITY?
 
(a) OCK secured contract from MyTel to construct additional 300 towers in Myanmar (Growing No of Towers)
 
(b) Additional co-location of about 200 towers in Myanmar not fully reflected yet in accounts (Growing Tenancy Ratio)
 
(c) Telenor's balance of 280 towers to be construted
 
(d) AES JV project has yet to contribute
 
(d) Solar power earnings not fully recognised
 
Btw, I preferred OCK WA (3 years to expiry), upside is better (currently at 26.5sen only 8% premium with 3 years to expiry.  
 
 
ANY OTHER STOCKS WITH SIMILARITY LIKE OCK GROUP?
 
There are many more.  Some that I am aware of, such as Ekovest, Gadang, Solution, Bornoil, WCEH, etc. where capex allocation is approved or in progress but the earnings has yet to come in.  That means Equity comes before Earnings, hence the high PE and low ROE for some of them.  Of course, there are also many others where its share price outrun their "estimated value" due to their popularity or public's fickle opinion about its prospects in the short run.
 
 
UPDATES @ 5 JAN 2018
 
Fundamental events happened in 2017 but not reflected by its share price:
 
1.  MPT a significant become co-tenant - improving tenancy ratio from 1.15x to 1.30x.
 
2.  MPT requested OCK to build additional 300 towers 
 
3.  Relocations of Telenor's towers nearer to city (positive for co-tenancy)
 
4.  JV in AES project 
 
5.  Cost improvements for Vietnam existing BTS and additional BTS.
 
6.  Additional solar power plant contributing vs 2016.
 
Share price for 2017 move sideways (up and then down then sideways)
 
1.  OCK deliver only 640 towers instead of 920 towers.  Only about 70% being built.
 
2.  OCK first 3Q did not bad (increase 20% +), while many not familiar that OCK's 4Q represent about 50% of the profits.
 
OBSERVATIONS BASED ON EXPERIENCE (KLSE - VOLUME ABOVE RM5 BILLION)
 
1.  Always focus on the fundamental of the company.  It is no doubt, all the new and additional contributions is coming in progressively, but the "market" or the "share price" is not moving.  The divergence of share price and fundamental is increasing, I believe this gap will be reduced over time (although now telco towerco is new to the market)
 
2.  In fact, the premium of the warrants has dropped from about 11% to 6%.  Shares are mainly held by institutionals while warrants are mainly held by retail investors, so, higher volatility.  Actually this mismatch created great opportunity for new investors to buy its warrants at a cheaper price (exercise price is 71 sen), warrant @ 5 Jan 2018 is 25.5sen, only around 7% with the mother price traded at 90 sen.
 
3.  The listing of edotco (towerco biz) in 2018, will attract institutionals and retailers into this "good and sustainable biz".  The listing of biggest towerco in China will also raise awareness for this industry.  Perhaps these will be the INFLEXION POINTS for OCK.
 
4.  I am grabbing a bit more OCK WA at 25 sen.  
 
The rebound will be very fast (e.g. Gadang Warrant, rebounded from 38 sen to 48 sen in one week time (up 26%) and even for Ekovest warrants with 18 months to expiry, its price went up from 55sen to 72sen (up 31%) in one week time).  This is an good opportunity, especially this coming 4Q in Jan 2018.  Afterall, OCK warrants has 3 years to expiry.  It's about risk reward opportunity - as the positive events can be executed in one or two years time.
 
5.  Most analysts is inaccurate to used fully diluted number of shares to calculate its fair value, which in practice it seldom happen)
 
OCK (0172)
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Discussions
2 people like this. Showing 5 of 5 comments

Edwardong53

Has been monitoring OCK since early 2016..... lucky didn't jump into it ..... still below 1.00

2017-12-21 19:46

firehawk

evrything is good， except price

2017-12-22 16:17

sosfinance

Focus on the cash flow from the tower business. Accounting useful lives of 20 years for towers is high, hence, lowered the EPS but cash flow will be higher.

For the first few years, profits are lower because of interest on loans. Once the repayment starts, profits will gradually goes up. Similarly, once the additional tenancy ratio fully recognised, cash flow + profits will improve.

2017-12-22 17:20

funda

another benefit of buying OCK wa is the leverage effect...gearing of about 4x...very rare in the market...

2018-01-04 17:16

bpng0904

SOS, your sharing is very informative, however OCK share price has been rather frustrating. As of today, the market price is 81sen and ock-wa price is only 22.5sen.

I think the reasons for the fall in share price could be:
1. Fall short of target NP - in your first article on OCK, point 7 states that analyst projected PAT for FY2017 is between 35m to 45m. Current more realistic NP for FY2017 is between 30m to 31m. Nevertheless, until Q4 2017 result is released on end of Feb2017, we will never know.

2. High increase in total debt - 2016Q4: 146m, 2017Q1: 355m, 2017Q2: 386m, 2017Q3: 434m - hence higher finance cost, a drag on its bottomline

Can I get your view on the above two points? Honestly, my average price for ock wa is above 30sen and I am still holding now, it is not easy for me. But, one thing did surprise me is that OCK declared a dividend of 1sen for FY2017. Thank you.

2018-02-11 23:43

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