OCK (0172) - UOB Kay Hian starts coverage of OCK with fair value of RM1.30

KUALA LUMPUR: UOB Kay Hian Malaysia Research has initiated coverage of OCK Group with a sum-of-parts derived fair value of 95 sen.

It said on Tuesday OCK is an experienced network service provider poised to grow tower assets in frontier markets.

“We project a three-year core earnings CAGR of 16.5% over 2015-18 driven by stable rents from 920 towers in Myanmar.

“Importantly, we see deep value in the stock as rising tenancy ratio will provide scope for meaningful earnings upside. Our blue-sky scenario points toward a fair value of RM1.30 a share (upside of 57% from current share price),” it said.

UOB Kay Hian said OCK is poised to grow long-term recurring earnings via the commercial operations of 920 telco towers (capex is US$75mil or RM310mil) in Myanmar.

It expects maiden full-year rental income of approximately US$15mil or RM62mil in 2017. We estimate the Myanmar towers (or Myanmar tower-co) will help drive a three-year core earnings CAGR of 16.5% over 2015-18.

The research house said importantly, additional site expansion and rising tenancy per tower will provide scope for significant earnings upside.

Higher tenancy ratio (from one time to 1.15 times), taken together with stable rentals could further lift its base-case earnings projection by 26% and 41% for 2017 and 2018 respectively.

This translates to a blue-sky three-year earnings compounded annual growth rate of 31% (vs base-case of 16.5%).

UPB Kay Hian Research said OCK plans to place out 105m new shares to a strategic shareholder. The proceeds to be raised from the private placement (of approximately RM86mIL, based on current share price) could be channelled towards the acquisition of brownfield tower assets within the Indochina region.

“Based on our conjecture, a tower asset acquisition of eight to nine times EV/EBITDA will likely be value accretive, as the stock currently trades at 11 times forward EV/EBITDA.

“We value Myanmar tower-co on a discounted cashflow method, to capture stable cashflow amid stable rental outlook. We have factored in up to 3,000 sites by 2020 in DCF-valuation for Myanmar tower-co. Our target price implies a 20% upside from the current share price level. At our target price, the stock would trade at 12.6/10.9 times 2017/18F EV/EBITDA. We are positive on the stock given strong earnings growth outlook, and believe the company deserves premium valuations.

“Near-term key re-rating catalysts for the stock include: a) sizeable M&A of tower asset within Indochina, including Vietnam, b) additional tenant for Myanmar tower-co, and c) eventual listing of a sizeable tower-based assets,” it said.

OCK (0172) - UOB Kay Hian starts coverage of OCK with fair value of RM1.30