We are initiating coverage on OCK Group Berhad (OCK) with an OUTPERFORM rating and a DCF-driven target price of RM0.95. OCK is principally involved in the provision of telecommunications network services. We like OCK for: (i) its healthy cash flow on the back of escalating recurring income trend, (ii) spreading its wings in Myanmar and across Southeast Asia, (iii) its ability to ride with the passive infrastructure sharing trend, (iv) its EBITDA margin expanding trend, and (iv) potential growth through M&A activity.
Escalating recurring income trend. OCK’s strategy to strengthen its recurring income through strategic regional expansion has started to bear fruit. Its recurring income has soared to 18% (of the total group’s turnover) in FY15 vs. 1.4% in FY13. Moving forward, we expect the group’s turnover to record 26% YoY/22% YoY growth in FY16/FY17, mainly underpinned by the full-year managed services' revenue contribution from PMT and the maiden site rental business from Telenor Myanmar. The strong revenue growth is expected to drive the recurring income contribution to 23% (of its top-line) in FY16 and 30% a year later.
Spreading its wings in Myanmar, one of the fast-growing emerging economies. OCK intends to build up to 3,000 telecommunications towers over the next five years after delivering the initial 920 telecom towers to Telenor Myanmar by end-CY16. The Myanmar project is expected to contribute c.RM60m revenue per annum with a lucrative targeted EBITDA margin of c.60%, significantly higher than the group’s FY15 EBITDA margin of 16.5%.
Riding on the passive infrastructure sharing trend. There is an increasing trend for telecom operators to outsource their passive towers to third-parties to reduce their operating expenses. Increasing competition, along with investments in ever-changing technology, has been pushing telecom operators towards passive infrastructure sharing in order to maintain margins. OCK, being one of the independent tower operators, is well competent to ride the trend.
EBITDA margin to trend higher. We estimate the group’s EBITDA margin to trend higher from FY16 onwards, thanks to the growing recurring income base that is yielding higher margin as a result of the steady operating cost structure. We expect its EBITDA margin to be sustained at 16% in FY16 but surging to 20% a year later after the high margin Myanmar project kick-in.
Initiating with OUTPERFORM call and TP of RM0.95. We expect OCK to record another double-digit annual growth of 18% (to RM29.2m) in FY16 on the back of higher telecommunication network services contribution. FY17E net profit, however, is expected to growth marginally by 1.1% (to RM29.5m) as a result of the higher depreciation cost incurred after the full-year rental income contribution of its Myanmar project. Dividend, meanwhile, is expected to remain low in view of the capital intensive business model. Our valuation methodology is based on DCF valuation (WACC: 9.1%, TG: 1.5%) instead of the traditional PER methodology. This is to capture the group’s steady cash flow from its core tower operations over the long-term, capex required, as well as management’s strategy to drive recurring revenues.
Risks to earnings are: (i) project risks, (ii) dependence on directors and key personnel, and (iii) dependence on major customers/contracts.
Source: Kenanga Research - 5 May 2016
OCK (0172) - OCK Group Bhd -Towering Prospect
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