This article first appeared in The Edge Malaysia Weekly, on May 23 - 29, 2016.

SHARES of telecommunications tower builder OCK Group Bhd ended 5% higher at 83.5 sen on May 5 when Kenanga Research started coverage on the company with an “outperform” recommendation and said it was worth 20% more at 95 sen. Its warrant, OCK-WA, ended 11.1% higher at 20 sen the same day.

RHB Research Institute, which had started coverage on OCK earlier, had a higher target price of RM1.02 apiece.

Although both securities had retraced their gains at the time of writing, Kenanga and RHB still have “buy” calls on the company.

“We like OCK for its healthy cash flow on the back of its escalating recurring income trend, the spreading of its wings in Myanmar and across Southeast Asia, its ability to ride the passive infrastructure sharing trend, its Ebitda margin expanding trend and its potential growth through M&A (mergers and acquisitions),” Kenanga says in a note on May 5.

“Investors who have a higher risk appetite could consider leveraging the group’s warrants rather than its ordinary shares,” it adds. The research house values the warrants at 44 sen based on the Black-Scholes options pricing model at its 95 sen target price.

OCK-WA has a one-for-one conversion ratio and 71 sen strike price. It has more than four years to run before expiring on Dec 15, 2020. Closing at 20 sen last Tuesday, the derivative fetched a 14.1% premium over the underlying shares, which closed at 78 sen.

If one were to disregard the warrant’s time value under the Black-Scholes model, OCK-WA would be worth 33.3% more at 24 sen apiece (assuming zero premium to the underlying stock) should OCK’s shares gain 21.8% to reach Kenanga’s 95 sen target price.

Kenanga expects the company’s earnings to record another year of double-digit annual growth of 18% to RM29.2 million in FY2016 on the back of a higher contribution from telecommunications services. “Net profit for FY2017, however, is expected to grow marginally by 1.1% to RM29.5 million as a result of higher depreciation cost incurred after the full-year rental income contribution from its Myanmar project,” it says.

The research house expects OCK’s recurring income to hit RM92 million in FY2016 and RM144 million in FY2017 (23% and 30% respectively of group turnover, from 18% or RM56 million in FY2015), underpinned by the full-year revenue contribution from managed services in Indonesia and the maiden site rental business from Telenor Myanmar. OCK aims to raise its recurring income to above 40% through future M&A.

In a March 15 note, RHB says the potential listing of Axiata Group’s tower unit, edotco, which also has operations in Myanmar, “would further raise the appetite [for] and profile of tower companies in the region given their attractive business models and steady cash flows”. 

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