This article first appeared in The Edge Financial Daily on May 31, 2019

OCK Group Bhd
(May 30, 46 sen)
Maintain buy with a lower target price of 75 sen: OCK Group Bhd’s first quarter of financial year 2019 (1QFY19) core earnings were broadly in line with the typical exhibited seasonality. The share price has fallen by 24% over the past month on concerns over earnings risks in Myanmar.

At current levels, the market attaches little or no value to OCK’s  towerco, which is unjustified, in our view, as it is a key earnings catalyst and growth driver. Weaker-than-expected margins and slower towerco growth are key risks.

1QFY19 core earnings fell 40.2% quarter-on-quarter (q-o-q) (+82.4% year-on-year [y-o-y]) to RM5.3 million on seasonally lower revenue (-23.1% q-o-q) and higher depreciation (+90.2% q-o-q), partially offset by lower tax.

This formed 18%/17% of our/consensus estimates. Telecommunications company network services revenue (84% of group revenue) fell 21.4% (+0.4% y-o-y) with the high base of project billings in 4Q of 2018 (4Q18).

Positively, earnings before interest, taxes, depreciation and amortisation margin expanded seven percentage points sequentially to a new high of 27.9%, as regional revenue contribution expanded to 42% in 1Q19 (4Q18: 38%).

Tower leasing revenue remains the key growth driver, up 27% y-o-y (+8.3% q-o-q), supported by higher site tenancies and deployments in Myanmar and Vietnam.

We understand discussions are ongoing to acquire more sites locally and in Myanmar/Vietnam, which, if successful, would boost the overall site count to over 5,000.

This would still be a fraction of the over 18,000 sites owned by edotco Group — the largest towerco in Malaysia.

OCK’s biggest tower portfolio is in Vietnam, where it currently owns more than 2,500 sites.

In Malaysia, the group owns over 340 sites (mainly on a build and lease model).

Given that merger discussions between Telenor and Axiata have started (non-binding), we do not rule out Telenor Myanmar putting under review new built to suit orders.

A recent meeting between OCK and Telenor officials in Myanmar suggests it is business as usual.

While the existing master leasing agreement inked in 2015 is not sacrosanct (exit clauses built in with penalties invoked), we believe Telenor is unlikely to “renege” on the contract, as doing so would be detrimental to its network coverage and market share.

The merger could nonetheless impact future site deployments and/or tenancies with edotco (the merged towerco of Telenor and Axiata) having the first right of refusal. — RHB Research Institute, May 30