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Wednesday, November 30, 2016

Brokers Report: OCK Group - Final Quarter Push

Maintain outperform with unchanged target price (TP) of RM0.93

9M16 PATAMI of RM14.6m came in largely within expectation. No dividend was declared, as expected. Moving forward, we expect the group to record a strong sequential quarter, in tandem with the telecom operators’ tendencies to ramp up capex in the 4Q of each financial year. We made no changes to our FY16E/FY17E earnings forecasts for now, pending today’s briefing. Maintained OUTPERFORM call with an unchanged TP of RM0.93 based on DCF valuation (WACC: 9.1%, TG: 1.5%).

Broadly in line. 9M16 PATAMI of RM14.6m (+12% YoY) came in largely within expectations at 53.2%/51.7% of our/market consensus’ full-year estimates (vs. the historical 9M contribution of 53%-58% range of full-year results for the past three years). Despite the 9M16 merely accounting for about half of our full-year estimate, we expect the group to record a strong 4Q underpinned by telecom operators, who tend to ramp up capex during the last quarter of each financial year.

YoY, 9M16 revenue soared to RM294m (+40%) on the back of higher telecommunication network services (“TNS”, +45% to RM244m) contribution, mainly underpinned by its regional business in Indonesia, Cambodia and Myanmar as well as higher contribution form contracting works in Malaysia. In addition, the group’s M&E division improved by 50% to RM18m, thanks to higher delivery of engineering works on existing projects. PBT enhanced 27% to RM26m, mainly driven by higher turnover but partially offset by heavier administrative, depreciation, and finance costs as a result of higher staff counts as well as larger tower portfolios.

QoQ, 3Q16 turnover dipped by 11%, largely due to lower revenue contribution from TNS (-7%), trading (-47%) and M&E Engineering Services. Despite lower top-line performance, its PBT improved by 17% with margin increasing by 250 bps to 10.8%, thanks to new projects from TNS segment with higher margin.

Outlook. OCK is expected to continue benefiting from the rapid network expansion plan undertaken by the local major telcos. We understand that the group aims to grow its recurring revenue business via own-build towers and acquiring existing tower-sites operators in ASEAN. Apart from focusing on the telecommunication business, we understand that the group is also sourcing for more business and/or investment opportunities in the sustainable energy sector that is rapidly growing in demand.

We continue to 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.

Risks to earnings are: (i) project risks, (ii) dependence on directors and key personnel, and (iii) dependence on major customers/contracts.

Source: Kenanga Research - 30 November 2016

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