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This article first appeared in Corporate, The Edge Malaysia Weekly, on July 11 - 17, 2016.

IN the face of a margin squeeze at home, OCK Group Bhd is finding its way to greener pastures abroad, riding the growing investment in telecommunication infrastructure in the region. 

The group has expanded aggressively overseas in the last three years. Indeed, its ventures into other Asean markets have not only provided a fresh source of earnings growth but also a recurring income stream as OCK builds, owns and leases telecom towers back to carriers.

Multinational companies are eyeing a slice of the action in infrastructure development in Asean countries like Indonesia, Myanmar, Vietnam, Cambodia and Laos, including telecommunications projects. That will augur well for companies like OCK, whose core business is building telecom towers.   

“The telecommunications industry in Myanmar has grown tremendously over the past few years, and it still presents enormous growth opportunities in view of the growing demand for more telecommunications towers,” says managing director Sam Ooi Chin Khoon, who founded the company in 2000. 

OCK’s profit margins (see charts) have been declining despite an impressive double-digit compound annual growth rate (CAGR) in revenue in the past five years. Its profit growth in the financial year ended Dec 31, 2013 (FY2013) was flattish at 3.3% and could well have remained flat in FY2014 if not for the overseas contribution.

Nonetheless, pre-tax profit for FY2015 surged 57% to RM37.3 million. It is worth noting that, excluding the revaluation gain of RM4.7 million, core margins for local operations saw a marked contraction in 2015, even though domestic sales jumped 51.5% to RM265.2 million.

Currently, its biggest overseas contribution is derived from Indonesia with the 85% stake OCK bought in PT Putra Mulia Telecommunication in September 2014 for RM21.3 million.

Putra Mulia, an Indonesian tower maintenance company, currently manages 20,000 sites and commands a substantial 26% market share in the archipelago. The subsidiary helped to raise the proportion of recurring income to OCK’s total FY2015 revenue to 18% and overseas revenue contribution to 17%.

But its biggest break came last December, after its 70%-owned subsidiary signed a master services agreement with Telenor Myanmar, a subsidiary of the Norwegian Telenor Group, to build and lease 920 towers in the country for an initial term of 12 years. The US$75 million project, OCK’s maiden greenfield project outside of Malaysia, will expand its tower ownership from 200 to 1,120 and shift its business model from building towers to asset ownership.

“We have started handing over sites to Telenor and are on track to complete the 920 sites this year,” says Ooi, who controls 39.8% in OCK through Aliran Armada Sdn Bhd. 

As OCK started to deliver towers to Telenor Myanmar in May, analysts expect the Myanmar project to contribute US$2.5 million or RM10 million of recurring revenue in FY2016 and could make a full-year rental income of about US$15 million in FY2017. The project’s profitability and its contribution to the group’s bottom line, however, will depend on cost management, financing costs and, more importantly, tenancy ratios.

Management believes opportunities to boost tenancy ratios at OCK’s sites are high and Myanmar, the last frontier in telecoms, offers huge growth opportunities for OCK post-completion of the 920 towers this year. 

“There are currently three telecom operators in Myanmar, Norway’s Telenor, Qatar’s Ooredoo, and Myanmar and Japan’s KGSM/MPT. Moreover, military-run Vietnamese telecom company Viettel is expected to launch its services in 4Q2016, joining the three existing licence holders,” says OCK Yangon CEO John Seet.

“As each operator will be required to have at least 9,000 sites by 2017 to meet the regulatory commitment of at least 75%  to 85% geographical coverage, tower sharing will be the easiest and most economical way for telcos to meet the government’s coverage mandate. 

Putting together all the operators’ needs, we estimate at least 20,000 towers are required in Myanmar for coverage by 2017 and another 10,000 will be needed for capacity and quality of service,” Seet says.

He disagrees that OCK is late to the Myanmar market. He believes the timing is just right. OCK could learn from the mistakes made by the first batch of telecom tower companies that came after the country liberalised the telecom sector in 2013. 

“These pioneer companies have in the last few years trained up skilled workers who have experience in dealing with the government. They used to build multiple towers in the same location, resulting in overinvestment. But now the government has come up with new regulations to restrict the construction of duplicate sites. 

“With their capital tied up, we think we will be one of the prime beneficiaries to ride the rapid growth in Myanmar’s telecommunication infrastructure,” he says.

OCK has made no secret of its intention to build up to 3,000 telecom towers in Myanmar in the next five years. So far, analysts are convinced by its regional growth story. 

OCK is on the recommendation lists of the five research houses that track the stock with a discounted cash flow-derived target price of 95 sen to RM1. It closed at 81.5 sen last Tuesday, trading at a forward price-earnings ratio of 28.1 times, according to Bloomberg. 

UOB Kay Hian estimates a fair value of RM1.30 per share in a blue-sky scenario where OCK expands its sites in Myanmar to 3,000 by 2020 and 4,000 by  2024 with a tenancy ratio of 1.15 times.

Kenanga Research analyst Cheow Ming Liang projects recurring income from the Myanmar project to account for 23% of its total turnover in 2016 and 30% in 2017 when the sites are fully commissioned. 

While Myanmar offers tremendous growth opportunities, CLSA analyst Jian Bo Gan notes, execution could be a risk for OCK, given that Myanmar is a new market and its big leap in business model from service provision to asset ownership.

In a non-rated note issued after he returned from a site visit in Myanmar, Jian comments that the Myanmar project is progressing well, with the first batch of 50 towers completed and rollouts likely to accelerate over the coming months. He opines that the successful execution of this project — OCK’s most capital-intensive foray in its 16-year history — is key to the rerating of the stock and for future contract wins.

OCK’s balance sheet is in a net cash position with total borrowings of RM81.96 million and cash balance of RM139.55 million as at March 31. 

However, last month, the group announced a private placement to raise up to RM86.6 million to fund an acquisition in Indochina. 

The fresh capital raised will further strengthen OCK’s financial muscle for its aggressive expansion trail in Asean. Nonetheless, this implies that OCK is unlikely to pay good dividends anytime soon. 

It is worth noting that OCK has a big chunk of 264.08 million warrants that came with the rights issue in December last year. The total number of warrants, which expire in December 2020, is equivalent to about 30% of OCK’s enlarged share capital after the latest proposed private share placement. 

The derivatives are “in the money”, given that the exercise price of 71 sen is below market price.  

A big question for minority shareholders is probably whether the anticipated robust earnings growth will offset the impact of the dilution.

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