Seasonally stronger quarter for OCK seen

TheEdge Thu, Feb 21, 2019 10:34am - 5 years View Original


OCK Group Bhd
Maintain a buy with a target price (TP) of 89 sen:
OCK remains our preferred small-capitalised sector pick and is scheduled to announce its fourth quarter financial year 2018 (4QFY18) results on Feb 26, 2019. We expect a seasonally stronger quarter on better margins with the towerco (tower business) leasing as the key growth driver.

 
OCK trades at eight times FY19F enterprise value/earnings before interest, taxes, depreciation and amortisation (EV/Ebitda), below its historical five-year mean of nine times, and at a discount to its Indonesian towerco peers.

The valuations are supported by the positive outlook of its regional towerco businesses and the increasing base of recurring revenues.

The key risks are weaker-than-expected earnings and operational execution. The eventual spin-off of its tower business unit is a major upside risk.

A tighter focus on cash flow and working capital going forward, alongside cost discipline are expected.

Given that the towerco business tends to be capital expenditure-heavy in the initial years (acquisitions and build-and-leaseback agreements), the group’s regional forays have lifted its net gearing from 0.04 times at end FY16 to 0.9 times as at 3QFY18.

The management is exploring alternative funding options and has ruled out a cash call. The listing of its towerco business (OCK SEA Pte Ltd) in the medium to longer term should relieve pressure on its balance sheet.

Assuming OCK halves its debt collection days currently, this could potentially unlock RM80 million to RM100 million in cash, based on our estimates.

OCK recently bagged a 300-site build-and-lease contract from a local mobile operator, which is aggressively rolling out its Fourth Generation network. Tower leasing made up 26% of the revenue in 9MFY18 and is projected to widen to 30% by end-FY19, supported by merger and acquisition and additional site tenancies.

OCK’s share price is up 35% year-to-date, having been sold down 54% in 2018 due to the general aversion over small caps and concerns over its potential exclusion as a component of the FBM Shariah in the November 2018 review, which did not materialise as the stocks remain Shariah-compliant.

While there is still risk that the stock may be excluded in the next review end of May 2019, Shariah-related funds currently hold less than 1% of the group as at end-January. — RHB Research Institute, Feb 20

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