OCK's 9MFY24 results missed expectations, mainly due to weaker M&E revenue. 3QFY24 was a sluggish quarter across all segments, particularly for telco network services (TNS), resulting in OCK's lowest quarterly profit since 1QFY22. We cut our FY24F/25F earnings by 15%/24%, cut our TP by 29% to RM0.43 (from RM0.60), but maintain our MARKET PERFORM call.

M&E Engineering chiefly culpable. Its 9MFY24 core net profit of RM24.7m disappointed, coming in at 65% and 59% of our full-year forecast and the consensus estimate, respectively. The variance versus our forecast was mainly due to lower-than-expected contribution from M&E engineering services as segmental revenue dipped 54% QoQ.

YTD weakness due to slowdown at telco segment. 9MFY24 revenue contraction (-12% YoY) was primarily driven by decline in the TNS segment (-7% YoY) and the green energy & power segment (- 18% YoY). We attribute the weakness at TNS to the ongoing slowdown in network deployment for the first 5G network as it approaches completion. Topline weakness flowed through to bottom line, leading to a 22% YoY decline despite reductions in interest costs (-22% YoY), depreciation, and taxes.

QoQ dip due to M&E. Sequential topline decline of 1% QoQ was mainly driven by broad-based weakness across all segments except for TNS (+5.1% QoQ). Despite higher revenue, core earnings fell by 29% to RM5.8m, mainly due to weaker operating leverage in the M&E engineering segment. This translates to OCK's lowest quarterly profit since 1QFY22.

Forecasts. We cut our FY24F/FY25F earnings by 15%/24% to reflect lower M&E order book replenishment.

Valuation. We lower our TP by 29% to RM0.43 (from RM0.60) as we downgrade our valuation to 5.7x CY25F EV/EBITDA (from 6.3x), in-line with its historical average. We removed its premium on account of lower earning visibility at the TNS segment as order book replenishment prospects remains sluggish, while outstanding orders continue to deplete. Although the recent award of the second 5G network (NW2) to U Mobile marks some progress, the roll-out of contracts may face delays. This is because U Mobile will first need to select additional mobile network operator (MNO) partners, appoint a 5G Advanced technology vendor, and secure financing, amongst other measures. Additionally, the government will likely need to announce the 5G dual network policy to clarify NW2's coverage targets and access agreements with other MNOs. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We maintain our MARKET PERFORM call as OCK's earnings visibility may improve in the near term from new opportunities such as: (i) power backup solutions (PBS) for data centers, (ii) new digital business (solutions for cloud, smart cities, connectivity and managed solutions), and (iii) 5G network rollouts at Laos (new venture) and Vietnam as well looming implementation at Indonesia. To date, OCK's order book for data centre-related work amounts to roughly RM103m.

Risks to our call include: (i) unfavorable regulatory changes, (ii) prolonged delay in the roll-out of the second 5G network, and (iii) country and political risks at frontier markets where OCK has a presence.

Source: Kenanga Research - 29 Nov 2024