10 Feb, 2017
By RHB Research Institute / The Edge Financial Daily
OCK Group Bhd
(Feb 8, 82 sen)
Maintain buy call with a target price of RM1.05: The recent placements of edotco Group Sdn Bhd’s shares to Khazanah Nasional Bhd and the Innovation Network Corp of Japan have partially crystallised the value of the telecommunications tower company (towerco) while providing an inherent benchmark for valuing Malaysian towercos. We think this probably explains the recent small run up in OCK Group Bhd’s share price. edotco’s valuation of 12.5 times its financial year 2016 (FY16) enterprise value/earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) (pro-forma) compares with OCK’s 7.5 times FY17F (forecast) EV/Ebitda. Ascribing to a 20% discount to edotco’s EV to Ebitda ratio to reflect OCK’s significantly smaller scale, we estimate it could potentially unlock 18 sen per share for OCK and bump up our sum-of-parts valuation by 17.4%.
While edotco is the largest Asean towerco by virtue of the ownership of over 17,000 sites, OCK is still the only listed Malaysian regional towerco group. We do not rule out management exploring further opportunities for inorganic expansion in the towerco space to strengthen its regional ambitions. This could include participating in the liberalisation of a few towerco markets.
We expect the group’s fourth quarter of FY16 (4QFY16) revenue and Ebitda to hit a new record, underpinned by the robust growth of its transparent network substrate (TNS) segment and seasonality. 4QFY16 revenue is projected to rise by 20% to 25% year-on-year (y-o-y), driving core earnings growth of 20% to 22% for FY16 to over RM20 million — the highest in the group’s history. The TNS segment, which constitutes over 80% of revenue and Ebitda, should see a seasonal uplift from increased billings, ongoing long-term evolution and fibre deployment, and network optimisation projects for telcos ahead of the ongoing spectrum assignments.
We expect the strong underlying earnings momentum to flow through its FY17, supported by the first full-year contributions from its towerco ventures in Myanmar and Vietnam. The Telenor Myanmar build-and-lease project saw maiden lease rentals booked from 4QFY16. Also, the recently completed acquisition of South East Asia Telecommunications Holdings Pte Ltd should see OCK consolidating its earnings from the end of its 1QFY17. We gather that it has recently inked a second tenant while talks have commenced with Viettel, the fourth mobile licensee on co-locations. OCK successfully transferred over 550 sites to Telenor and appears on track to complete 720 sites by end-1QFY17. We project its FY16 to FY19 revenue compounded annual growth rate of 37% for the towerco business, driving a higher base of recurring revenues. — RHB Research Institute, Feb 8