OCK’s FY23 results trumped expectations. Its bottomline surged 25% on the back of improved tower tenancy ratios in Malaysia and higher rates for network management at Indonesia. We raise our FY24F net profit forecast by 2%, lift our TP by 9% to RM0.80 (from RM0.73) and maintain our OUTPERFORM call.

Convincing earnings beat. Its FY23 core net profit of RM45.9m exceeded our forecast by 8% and the consensus estimate by 11%.

The variance versus our forecast was mainly due to lower-than- expected interest expense and taxes in 4QFY23. 4QFY23 DPS of 1.0 sen brought FY23 DPS to 1.0 sen (FY22: nil), which exceeded our expectation.

Brisk activities across all segments. FY23 topline growth (+17% YoY) was propelled by expansion across the board, especially at the telecommunications network services (TNS) segment. In particular, we believe this was driven by higher tenancy ratios for OCK’s towers in Malaysia following sustained roll-out of 5G equipment via co-location.

The growth in topline cascaded to bottomline as improved operating leverage more than cushioned the impact of higher interest costs (+38% YoY), taxes and depreciation. Additionally, to a lesser extent, bottomline was boosted by increased contribution at the green energy and power business. This was driven by recognition of revenues (c.

RM19m) from contracts to provide power solutions at data centers in Penang and Iskandar Johor.

Boosted by interest savings from debt refinancing. Sequential topline was lower by 12% QoQ as higher TNS revenues were unable to offset contraction at the other segments. This was following the completion of projects, particularly for engineering services and power solutions contracts. Coupled with recognition of lumpy seasonal costs in 4QFY23, , this led to segmental 4QFY23 pretax losses across the board (except for TNS).

Nevertheless, 4QFY23 earnings expanded by 4.3% QoQ on the back of lower taxes and interest savings. The latter was underpinned by refinancing of OCK’s USD-denominated debt in Dec-23. This was via proceeds from the first tranche (RM400m) of its RM700m sukuk murabahah program.

Growing momentum in data center contracts. OCK is gaining traction in provision of data center power management solutions. After having completed two contracts for Intel’s data centers at Penang, OCK has two ongoing contracts at Iskandar. This is for YTL Power and Bridge Data Centers (BDC) with outstanding value of circa RM25m. In particular, for BDC, OCK is currently executing its contracts for Phases 3B and 4A after having completed the earlier phases. Moving forward, OCK expects to be involved in upcoming phases for BDC’s ongoing data center development.

Riding on 5G wave in Malaysia. We expect OCK to continue to benefit from continued deployment of the first 5G network in Malaysia. This would be via involvement in the roll-out of an additional estimated 2,500 5G sites in 2024 (2023: c. 5,000 sites).

Moving forward, for Malaysia’s upcoming second 5G network, we believe that OCK may also gain from: (i) co-location at its existing tower sites, and (ii) construction of new build-to-suit (BTS) towers. This is underpinned by OCK’s track record and involvement in the successful roll-out of 5G sites for the first network. Furthermore, we believe that new BTS sites are required to expand Malaysia’s 5G coverage footprint.

Forecasts. We raise our FY24F net profit forecast by 2% to reflect lower interest costs and higher contract margins for network managed services. In addition, we also introduce our FY25F numbers.

Valuations. Correspondingly, we raise our TP by 9% to RM0.80 (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).

Investment case. We continue to like OCK given that: (i) it is well positioned to benefit from JENDELA Phase 2 and 5G roll- out projects in ASEAN, (ii) it has strong earnings visibility as 55% of its topline emanates from recurring income derived mainly from telco tower leasing and network management contracts, and (iii) it may potentially expand to new regional markets with growth potential such as Laos. Maintain OUTPERFORM.

Risks to our call include: (i) unfavorable regulatory changes, (ii) delayed roll-out of 5G infrastructure, and (iii) country and political risks at frontier markets where OCK has a presence.

Source: Kenanga Research - 28 Feb 2024