PETALING JAYA: Inorganic expansion and new build-to-suit site orders will see OCK Group Bhd’s recurring revenue contribution exceeding 80% in financial year 2021 (FY21).
This offers longer-term earnings visibility and certainty for investors, said RHB Research.
It added that OCK was looking to acquire around 1,100 brownfield tower sites in Vietnam and 300-400 sites in Myanmar this year.
The house has raised its FY20-FY22 core earnings by 3%-7% after factoring in the Indonesian site maintenance contract of US$5mil per annum and six new solar assets.
It added that recurring revenues set to top 70% in the second quarter of FY20 (Q2), driven by the recent site maintenance contract clinched in Indonesia and new tower-builds.
Recurring revenue contribution accelerated to 68% in Q1 of FY20 (from 54% in Q4 of FY19), supported by six new solar farms and site tenancy additions in Myanmar and Vietnam, the house said.
“We expect core earnings to grow by a two-year compounded annual growth rate (CAGR) of 12%, driven mainly by the tower leasing business and steady margins, ’’ RHB Research added.
It highlighted the upside risk to its forecast from new contracting jobs and stronger-than-expected tenancies.
The key risks are weaker-than-expected margins/earnings and execution.
OCK is proposing a 1:10 rights issue with one free warrant for every rights share subscribed to raise RM24.4mil.
An employees share option scheme of up to 15% of the group’s share base has also been proposed.
In November last year, the company had raised RM52.26mil via a private placement exercise. It will use the proceeds for the group’s debt servicing and working capital needs.
“This would aid in easing the group’s gearing but at the expense of earnings dilution, ” Kenanga Investment Bank said.
Based on its computation for the maximum rights subscription, Kenanga estimates an ex-target price of 58 sen with an unchanged discounted cash flow target price of 63 sen. It has maintained a “market perform’’ on the stock for now.
“All in, this cash call appears apt as the group’s gearing continues to be stretched as it works towards expanding its tower portfolio, with the growing interest cost putting pressure on earnings.
“However, certain investors might take caution on the dilutive effect of the exercise.
“That said, this exercise could be taken as neutral to some, as the group has been refraining from paying dividends in favour of business growth and with a potential spin-off across the horizon looking to unlock some value, ’’ said Kenanga.
It has maintained a “buy’’ call with a target price of 68 sen.
It also expects mobile-related capital expenditure to pick up going into 2021 with the assignment of 5G spectrum and projects related to the National Fiberisation and Connectivity Plan.
“This should augur well for OCK, as it is the largest telco network services provider, ’’ Kenanga said.
Domestic contracting order book stood at RM90mil as at end-June.
Capacity upgrades and increased backhaul fiber works from enterprises’ digitalisation drive should keep the group busy.
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