OCK’s 9MFY23 results soared past expectations as its solid double-digit earnings growth was anchored by robust lease revenues on an expanded tower portfolio. OCK is an early beneficiary of 5G infrastructure roll-out across Malaysia and regional markets. We raise our FY23F net profit forecast by 12%, lift our TP by 2% to RM0.74 (from RM0.73) and maintain our OUTPERFORM call.

Results surpassed expectations. 9MFY23 core net profit of RM32m exceeded expectations at 84% and 96% of our full-year forecast and the full-year consensus estimate, respectively.The variance versus our forecast was mainly due to higher-than-expected margins at the green energy and power segment. As expected, no dividend was declared for the quarter.

Impressive double-digit YTD profit growth. 9MFY23 revenue growth (+28% YTD) was driven by broad based expansion across the board, particularly at the telecommunications network services (TNS) segment. The latter was underpinned by higher tower leasing revenues on an expanded tower portfolio. Additionally, to a lesser extent, increased contribution from solar farms provided a boost to segmental revenues at the green energy and power business.

However, the corresponding increase in bottomline was relatively lower (+19% YTD) due to the combination of: (i) cost pressure at regional markets, (ii) increased interest costs on the back of rate hikes, and (iii) higher taxes and depreciation. Nevertheless, it was a praiseworthy set of results as steady execution led to stellar doubledigit growth in earnings.

High operating leverage at the green energy segment. Sequential earnings surged by 28% due to the combination of robust topline expansion (+11%) and better operating leverage. In particular, this was mainly driven by the green energy and power segment. For the latter, pretax margins more than doubled to 31% (2QFY23: 13%) as topline increased by 58% QoQ.

Early beneficiary of 5G. The looming implementation of the new dual wholesale network for 5G in Malaysia bodes well for OCK. This will likely translate into opportunities to own or roll out new towers for the upcoming second 5G network over the next 2-3 years. To recap, vis- à-vis 4G technology, 5G operates on higher spectrum frequency which have shorter ranges and is easily blocked by high-rise obstacles. As a result, 5G networks may require more towers to ensure widespread coverage and maintain signal strength. On this same note, OCK also expects increased 5G tower opportunities in the Indochina region, particularly in Vietnam and Laos. Hence, this is expected to provide a meaningful boost to OCK’s current outstanding orderbook of RM279m.

Forecast. We raise our FY23F net profit by 12% to reflect lower manpower costs at the green energy and power business.

We raise our TP slightly by 2% to RM0.74 (from RM0.73) based on unchanged valuation of 7x FY24F EV/EBITDA. This is at a discount to our valuation of 8x ascribed to Edotco, reflecting OCK’s relatively smaller size. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We continue to like OCK given that: (i) it is well positioned to benefit from JENDELA and 5G roll-out projects in Malaysia and ASEAN, (ii) it has strong earnings visibility as 63% of its top line emanates from recurring income derived from telco tower maintenance and leasing contracts, (iii) it may potentially expand to new regional markets with growth potential such as Indochina, Kalimantan and the Philippines, and (iv) there is potential monetization of its telco tower assets. Maintain OUTPERFORM.

Risks to our call include: (i) unfavorable regulatory changes, (ii) delayed roll-out of 5G infrastructure, and (iii) country risks of emerging markets where OCK operates.

Source: Kenanga Research - 30 Nov 2023