This article first appeared in The Edge Financial Daily on October 12, 2018
OCK Group Bhd
(Oct 11, 56.5 sen)
Maintain outperform with an unchanged target price (TP) of 75 sen: OCK Group Bhd ventured into Vietnam’s telecommunications tower business in January 2017 through 60%-owned Southeast Asia Telecommunications Holdings Pte Ltd (SEATH). SEATH is the largest independent base transceiver station owner in Vietnam, with 1,998 telecommunications towers (as of end-calendar year 2017 and accounted for about 19% of independent tower market share) geographically dispersed throughout Vietnam. The group’s tower portfolios are mainly comprised of ground based (87%) and rooftop based (13%). All the towers are backed by long-term lease rentals (about five to 10 years) from the major mobile network operators in Vietnam (MobiFone, VNPT and Vietnamobile).
Vietnam’s 3G subscription penetration rate has surged to 34% (or 41.3 million subscribers) in 2017 from 25% two years ago and is projected to cross the 50% ratio by 2021. Besides, the country started to roll out the 4G/LTE services last year, and anticipated that more towers would be required to accommodate the latest technology. On the regulatory front, while there is no specific licence required to operate as an infrastructure service provider in Vietnam, there are comprehensive framework and tower construction permits that are required. On top of that, different tower construction permits (that comprise various requirements) are required in different provinces, and any site acquisition would also require the government as well as neighbouring sites (given that most of the smaller independent tower companies [towercos] are mom-and-pop shops) to grant the No Objection Certificate to the towercos. All these stringent regulations are barriers to entry for newcomers.
Meanwhile, the group’s Vietnam operation has a tenancy ratio of 1.29 times (with 3,087 tenants under its tower count of 2,397) currently, following the recent acquisition of 399 towers. Moving forward, SEATH is aiming to focus on business growth via acquisition (with minimum criteria set at 50% earnings before interest, taxes, depreciation and amortisation [Ebitda] margin and a 12% internal rate of return) with a targeted new site growth rate of 10% to 15% per annum and achieve 1.5 times to 1.6 times tenancy ratio in the next five years. We understand that the group is having a discussion with several towercos to acquire another 550 to 600 tower assets by year end (which could boost its tenancy ratio to 1.36 times if successful), with funding coming from internally generated funds and/or borrowings. With a large geographical spread and fragmented ecosystem, there are certainly opportunities for consolidation as well as co-location.
We have made no changes to our financial year 2018 (FY18) and FY19 earnings estimates post the recent site visit in Vietnam. Our TP is maintained at 75 sen (weighted average cost of capital: 9.1%). Stock valuations appear attractive following the 35% retracement year to date. We continue to like OCK for its healthy cash flow on the back of an escalating recurring income trend, its ability to ride with the passive infrastructure sharing trend, Ebitda margin expanding trend and potential growth through merger and acquisition (M&A) activity. Risks to our call include weaker-than-expected earnings and margins, changes in regulatory and cash calls. Key share price rerating catalysts, meanwhile, include spin-offs of its towerco unit (OCK SEA Towers) and earnings-accretive towerco M&A.
SEATH contributed about RM50 million turnover (or about 10%) to the OCK group in FY17 with an Ebitda margin of about 51%. Its contribution is expected to continue to rise in FY18 as a result of a larger asset portfolio. Nevertheless, management believes its margin is likely to taper off marginally (about 2% to 3%) in view of higher repair and maintenance costs for newly acquired assets during the initial year. The majority of SEATH’s turnover is mainly contributed by MobiFone (78%) and VNPT (14%), which are the second and third largest telecommunications operators in Vietnam with about 30% and 22% market share respectively. — Kenanga Research, Oct 11