This article first appeared in The Edge Financial Daily on January 15, 2018

OCK Group Bhd
(Jan 12, 89.5 sen)
Maintain buy with a target price (TP) of RM1.05: OCK Group Bhd has delivered about 650 units of towers to Telenor Myanmar. Additionally, Telenor recently released about 120 sites back to OCK and site acquisition is under way. To recap, the delay in identifying sites was due to Telenor’s network replanning process in early 2016. As of the third quarter ended Sept 30, 2017 (3QFY17), the Myanmar tower business contributed about RM30.6 million (or 9% of group revenue) with over 600 revenue-generating sites.

Positively, OCK has demonstrated the ability to attract additional tenants with Myanmar Post and Telecommunication (MPT) leasing approximately 180 towers (as a second tenant) recently. The tenancy agreement is for a period of 15 years and importantly, rentals are denominated in US dollars. This provides the group with some form of natural hedge as OCK Myanmar’s loans are in US dollars (US$40 million or RM158.8 million). Based on our estimates, the additional tenancy contract can potentially lift OCK’s 2018 (maiden full-year earnings contribution) net profit by 5%. 

We also understand that Myanmar’s fourth telco player could be looking to lease and build new towers over the next 12 to 18 months. This provides a good opportunity for OCK. As the tenancy ratio (defined as the number of tenants per tower) improves, positive operating leverage provides scope for earnings upside. Typically, earnings before interest, taxes, depreciation and amortisation (Ebitda) margins can rise from 50% (single occupant) to 55% with a higher tenancy ratio. Broadly, OCK aims to grow its tower assets in Myanmar by 200 to 300 annually. 

Vietnam towerco’s (SEATH) earnings have also been consolidated since 1QFY17, contributing RM37.4 million (or 11%) to group revenue. OCK’s near-term aim is to streamline the business unit and increase tower efficiency (focusing on cost discipline). 

At our TP, the stock would trade at 25 times 2018 price-earnings (PE) and 10.6 times enterprise value against earnings before interest, taxes, depreciation and amortisation (EV/Ebitda). Regional peers (specifically Indonesia-centric towers) trade between eight and 12 times EV/Ebitda (average: 9.4 times EV/Ebitda). The valuation premium reflects future growth prospects in frontier markets of Myanmar and Vietnam versus the relatively mature Indonesian telco landscape. — UOB Kay Hian, Jan 12