This article first appeared in The Edge Financial Daily on October 9, 2019
OCK Group Bhd
(Oct 8, 59 sen)
Maintain buy with a target price of 75 sen: OCK Group Bhd has announced a 10% share placement of 87.2 million shares to raise RM47.9 million, or RM62.5 million including a full warrant dilution of 264.1 million. Proceeds from the placement are for acquiring solar assets or farms — discussions on this are ongoing. OCK last conducted a share placement in financial year 2016 of 79.2 million shares to help fund its regional tower business (towerco) ambitions.
For the acquisition to be earnings accretive, we estimate the solar farms would have to generate annual incremental earnings of RM3 million to RM4 million, assuming a 70% debt financing. Solar farm revenue contribution, parked under its green energy and power solutions segment, is only 1% of the group’s revenue based on owning 11 solar farms under the fit-in tariff scheme, with a combined generation capacity of 5.9mw. Buying new solar farms should further strengthen its recurring revenue or margins, largely driven by tower site rentals.
We gathered the partial divestment of its towerco, OCK South East Asia Towers Pte Ltd (OCKT), is still on the cards. An agreement was to have been inked with a strategic investor in September, but was inadvertently held back due to “administrative” matters. Expectations are for the agreement to be inked by end-November.
We still positively view the impending monetisation of a stake in OCKT to unlock the value of its towerco, with the total number of sites owned exceeding 4,000 in Malaysia, Myanmar and Vietnam. The divestment would serve as a valuation benchmark for its towerco’s eventual listing in the longer term. Based on valuation discounts to edotco Group Sdn Bhd’s secondary share placement to Khazanah Nasional Bhd in 2017, transacted at 12.5 times enterprise value or earnings before interest, taxes, depreciation and amortisation, the sale could potentially unlock 13 sen to 35 sen per OCK share.
The recently announced RM21.6 billion strategic blueprint, National Fiberisation and Connectivity Plan to improve the country’s broadband infrastructure and accessibility, will be partially funded via the universal service provisioning fund. We believe OCK is well-positioned to capitalise on related infrastructure spending given its good track record of network and site deployments. — RHB Research Institute, Oct 8