• Maintain BUY and MYR0.70 TP (SOP), 44% upside. OCK Group has proposed to invest in a large scale solar (LSS) power producer in Kedah for an enterprise value (EV) of MYR350m (subject to closing conditions). While the investment would raise the group’s net gearing level in the near-term, it stands to benefit from additional recurring revenue and earnings with the cashflows backed by a long-term power purchase agreement (PPA).

• Ventures into LSS. OCK has entered into a conditional investment agreement with Zelestra Corporacion SAU and Solarpack Asia (SPK) in relation to an investment in SPK, the holding company for the operator of the solar asset (3SP). Under the investment, OCK would subscribe to 1,000 redeemable preference shares (RPS) in SPK for an EV of MYR350m, which may be redeemed for shares. The transaction is subject to closing adjustments and the settlement of a loan consideration.

• Details of the asset. 3SP owns and operates a 116MW solar photovoltaic (PV) plant in Kuala Muda, Kedah which commenced operations in Mar 2022. 3SP had previously secured a 21-year PPA with Tenaga Nasional (TNB MK, BUY, TP: MYR16.60) which was awarded under the LSS3 scheme in 2022. For FY23, 3SP generated revenue and PAT of MYR40.6m and MYR30.5m with the latter boosted by a one-off tax credit totalling MYR27.2m.

• Longer-term positive; further augments recurring revenues with stable cashflows albeit earnings dilutive on face value. We view the transaction positively: i) To further drive the group’s recurring revenues in the longer-term, and ii) to diversify from the mainstream telco engineering and network services segment (a core segment since the group’s inception). OCK stands to benefit from long-term cashflows from the solar asset (backed by the PPA). Note that recurring revenues from site leasing (towerco business), site maintenance, and renewable energy (RE) services contribute over two-thirds of group revenue. Using SP3’s trailing PAT of MYR4m and assuming 60% of investment is debt- funded, the deal looks slightly dilutive (c.-4%) based on our FY25F forecast EPS.

• RE contributions still nominal currently; gearing set to rise. OCK currently owns 29 solar farms with a combined capacity of 14MW, mainly via the Feed- in-Tariff (FiT). It is also involved in the Net Energy Metering (NEM) and Corporate Green Power Programe (CGPP) schemes. Revenue contribution of the RE segment (from the 29 solar assets) remains marginal, at under 5%. The investment would raise its net gearing to 1.2x from 0.7x at end-FY23.

• BUY maintained. We maintain our forecasts and TP pending further clarity from management on the transaction mechanics, with deal completion (shareholder approval at EGM required) slated for 2Q25. Key risks: Weaker- than-expected earnings, delays in project execution, and regulatory setback.

Source: RHB Securities Research - 11 Dec 2024