2. How to determine the right valuation for OCK Group? [PART 2]

In order to unlock the entire value of OCK Group, the Group MD Sam Ooi Chin Khoon (OCK) is planning for a spin-off listing of its tower business (towerco) on a foreign stock exchange by 2020.

1. What is a spin-off listing?

Spin-off are divisions of OCK Group (i.e. towerco business) that become independent business. Employees with skills expertise in towerco industry and existing assets owned by OCK South East Asia Towers Pte Ltd (OCKT), 100% owned subsidiary of OCK Group will be transferred out from the parent company, OCK Group.

Shareholders of the parent company will receive equivalent shares in the company in order to compensate for the loss of equity in the original OCK Group's shares. However, shareholders may then buy and sell stocks from either company independently. 

2. Why is there a need to spin-off?

In normal circumstances, spin-offs allow high growth divisions such as towerco business to command higher valuation multiples once separated from the parent company.

With the total debt of RM480 million which majority of the amount is used to build its tower portfolio and lease liabilities of RM160.5 million, the company will incur huge interest expenses amounting to RM32 million. 

Depreciation has also increased throughout the year aligned with the expansion of towerco business to regional market such as Myanmar and Vietnam, the depreciation charge has increased from RM12 million in 2016 to RM62.6 million in 2019, an increase of more than 400% which eventually dilute the EPS. 

Both events would definitely lower down the profitability of OCK Group. With the ongoing expansion plans in place such as 5G, NFCP, and regional diversification to Philippines market, the towerco business will be expecting to incur more capital expenditures going forward. However, we know that the small seed you plant today will become a big tree tomorrow. While dominating the towerco space in Vietnam and Myanmar to be one of the largest telco tower provider in respective countries, OCK Group will benefit from the recurring income from tower leasing business.

Given the implementation of NFCP and further spectrum allocation for 700 Mhz, 3,500 Mhz and 2,600 - 2,800 Mhz in 2020, this would eventually translate to more jobs allocation for OCK Group as MNO players would need to undertake network deployment for the new spectrum bands. Recall from FY2016 and FY2017, revenue contribution from telecommunication network services segments of OCK Group has increased substantially following from reallocation of 900 Mhz and 1,800 Mhz spectrum among 4 incumbent mobile operators.

It is also expected that the towerco business will incur huge capital expenditure moving forward to cater for the growth in the telecommunication networks industry especially towards a new capex cycle required for 5G sites deployment.

3. Is there any impact on OCK Group from the Covid-19 outbreak?

Based on the interview with Group MD Ooi Chin Khoon which was published in The Edge Weekly 20 April 2020, he mentioned that there is no significant impact on its earning for the first quarter of 2020. However, there might be some delay in projects in near future. 

Mr. Ooi also pointed out that the spin-off is still in the pipeline, but it will be increasing its tower portfolio to a sizeable number before doing so. 

Currently the tower count of OCK Group stands at 4,200 towers. My view is that the spin-off will be announced once OCK managed to build a tower empire of 5,000 towers which will provide stable recurring income moving forward.

4. How do we value a spin-off divisions and the remaining segments of OCK Group?

According to Alliance DBS Research, the EV multiples that is usually ascribed to tower business is in the range of 11x to 13x.

Based on edotco's secondary share placement to Khazanah in 2017, the valuation is transacted at 12.5x EV/EBITDA. edotco is the largest independent towerco in Malaysia and is the most comparable towerco to OCK Group's tower business. According to RHB Research Institute, based on 12.5x multiples, the sale of OCK Group's towerco business could potentially unlock 13 to 35 sen per OCK's shares.

Since the edotco's share placement transacted at a 12.5x multiples which falls within the range of 11x to 13x, we can perform a sensitivity analysis based on the valuation.

The enterprise value of OCK Group is calculated as follows:

average 3-year EBITDA = RM113.4 million

Enterprise value of OCK Group = EBITDA * EV/EBITDA multiples

I have done a sensitivity analysis based on 11x to 13x of EV multiples. After arriving at the enterprise value, net debt and minority interest which do not belongs to equity investors have to be eliminated to arrive at equity value.

Then, indicative value is derived by dividing the equity value by the outstanding number of shares. 

At present, OCK Group's share price as of 29 April 2020 is 49.5 sen. Based on the sensitivity analysis performed above, there is an upside ranging from 40% to 88% which is above standard margin of safety of 30%. 

The indicative value or the target price is in the range of 69.4 sen to 93.1 sen based on 11x to 13x of EV/EBITDA multiples.

All information provided here should be treated for informational purposes only. It is solely reflecting author's personal views and the author should not be held liable for any actions taken in reliance on information contained herein.

No buy call. No sell call. No bullshit. Only content.

1. Most Potential Stock to benefit from NFCP [PART 1]

As we all know, 5G will be the next big thing in the world as it provide greater speed transmission in terms of internet connectivity. 

Following the announcement of Economic Stimulus Package 2020, MCMC is set to implement 6 projects at an estimated cost of RM3 billion under the NFCP (National Fiberisation and Connectivity Plan). 

One of the most potential stock to benefit from NFCP is no doubt the only listed tower telco player in Malaysia - OCK Group.

Telco Tower industry in Malaysia

To give a perspective, there are basically 2 types of tower owners in Malaysia. One of which is owned by MNO (Mobile network operators) while the other towers are owned by independent tower owners, also known as towerco. 

Here are several reasons for you to start to look at telco tower in Malaysia:

• Malaysia is one of the most advanced and innovative tower markets in Asia. There are an estimated 32,941 towers as of Q3 2019 in Malaysia, representing almost 1,500 mobile subscribers per tower. 

• Overall, the tower infrastructure in Malaysia is 30-40% fiberised.

• 5G is a top priority for the government and they have even created a 5G taskforce that will support the transition and help the industry with its rollout. 

• MNOs are now building new sites and fiberising their towers while trying to figure out whether partnering with pure fibre players, other MNOs or towercos is the best solution moving forward.

"With the deployment of advanced mobile technology such as 4G LTE and 5G, speed will be faster and more tower sites will be required. 

Operators worldwide today have started carrying out 5G trials and the 5G timeline includes the installation of additional cell sites, which requires significant fibre backhaul. In addition to that, existing tower and rooftop sites would need more modification and upgrading. 

As an independent TowerCo and telecommunication network services provider, we see this market move as a great opportunity to secure more contracts." as stated in OCK Group's annual report.

Business Models of Towercos

For independent towerco, there are typically 6 types of business models implemented in several countries outside of Malaysia, which is summarised as follows:

The most common business models for the towercos in Malaysia is buy-lease-back model, co-location services and build-to-suit model as well as managed services.

OCK Group

1. Introduction

OCK Group is an independent towerco company and has been in the telecommunication network services since 2000. 

OCK Group provides end-to-end full turnkey service to includes design, building and maintenance of telecommunications infrastructure. Its business models are build-to-suit, co-location sites and managed services.

Besides towerco business, the Group also ventured into environmental services such as green energy and power solutions. However today we will be focusing more on telecommunication network services which accounted for 83% of total revenue of OCK Group as of Q4 2019.

2. Market Shares

In terms of independent towerco business in Asia, OCK Group commands a fair market share which ranked 15 in Asian countries (excluding China), with a total of 4,066 towers spanning across Malaysia, Myanmar, Vietnam, Cambodia and Indonesia. 

This is followed by one of the leading industry players which has a presence in Bangladesh, Cambodia, Malaysia, Myanmar, Pakistan and Sri Lanka - i.e. edotco with 29,924 towers as at 2019.

In Malaysia, the towercos own approximately 60% of Malaysia's towers, led by edotco and state-backed and independent towercos.

Below are the information extracted from TowerXchange Asia Dossier Q2 2019:

edotco now owns over 11,000 towers in Malaysia, followed by the initial carve-out of 4,000 sites from Celcom (Axiata).

While for OCK Group, it currently owns more than 500 towers in Malaysia. Although the towers owned by OCK Group in Malaysia is not comparable to edotco at the moment, but the regional presence has been growing at CAGR of 14.4% from 2,800 towers in 2016 to 4,200 towers in 2019. It is rapidly undergoing expansion to increase its tower ownership with support from major MNOs. 

3. Prospects

OCK Group is currently managing more than 28,000 telco sites in Malaysia and Indonesia. Where managed services is concerned, the Group has identified a trend in Malaysia whereby the MNOs are starting to outsource their internal managed services to third party which bode well with OCK Group.

In Myanmar, to date, the Group has completed and handed over 1,000 sites and is still rolling out its current outstanding orderbook of more than 500 towers. 

In Vietnam, the Group is currently the largest independent towerco with a portfolio of more than 2,700 sites. According to Management, there are still plenty of opportunities especially in brownfield market in Vietnam whereby the market gears up for the rolling out of 4G LTE networks.

OCK Group is also planning to venture and expand into Philippines in 2020.

4. Financials

After explaning the qualitative side of OCK Group, how does their financial performance looks like? Is their balance sheet healthy? Let's look at some of their historical data.

2014

2015

2016

2017

2018

2019

Revenue 187,490 318,574 407,110 485,428 457,352 473,706 y-o-y % change - 70% 28% 19% -6% 4% 5 year CAGR - - - - - 20% 4 year CAGR - - - - - 10% Operating profit 32,287 52,680 63,728 66,085 68,305 70,986 Operating profit margin 17% 17% 16% 14% 15% 15% 5 year CAGR - - - - - 17% 4 year CAGR - - - - - 8% FCFO (A) 6,664 (23,862) 45,791 18,756 71,127 168,212 Capex (B) (17,152) (36,253) (192,737) (99,607) (117,883) (132,756) Free cash flow (A-B) (10,488) (60,115) (146,946) (80,851) (46,756) 35,456 Current ratio 2.64 3.42 1.82 1.19 1.55 1.31 Gearing ratio 0.34 0.25 0.33 0.84 1.00 0.83 Net cash YES YES NO NO NO NO

Based on the extracts above, we can observed that the revenue of OCK Group has increased significantly by 20% every year from 2014 to 2019, with operating profit increased by 17% annually. 

However, as telco tower business is a asset heavy business which would require OCK Group to consistently incur high capex for growth and expansion, OCK Group has been borrowing huge amount of debt which has increased from RM64mil in 2014 to RM480mil in 2019. This create pressure on the cash flow and gearing of the company. However, gearing ratio of 0.83 and current ratio of 1.31 is still manageable for a growing asset heavy company.

Despite incurring huge capital expenditure of approx. RM100mil every year since 2016, operating profit margin still able to maintain at 15% level despite high depreciation charged which is commendable.

As noted from the above, the FCFO generated in 2019 was healthy at RM168mil which was mainly due to better management of working capital with the collection/reduction in receivables. This marks the first time that OCK Group managed to generate free cash flow of RM35mil.

5. Valuation

In terms of valuation, share price of OCK Group has rebound to RM0.485 as at 24 April 2020, from the low of RM0.35, a pretty gain of approx. 40%.

Simple P/E ratio shows that the company is currently trading at 16.5x which is relatively cheap compared to other MNOs operators which is in the range between 18x to 30x.

However, PAT margin which is coming down and hovering around 6.5% does not indicate a good sign that the company is performing. Return on equity has been in a downtrend from 10% in 2014 to 5% in 2019. 

Besides, OCK Group Managing Director, Ooi Chin Khoon has been disposing his shares at a very fast pace. Since the start of MCO until now, he has disposed off more than 13mil shares.

Aliran Armada, ultimate holding company of OCK Group, the most substantial shareholder of OCK Group which has a shareholding of 28% has also disposed approx 4mil shares in the open market. Notably Aliran Armada is also controlled by Ooi Chin Khoon.

Does both events show that the Management is not having faith in their own company? Or is this due to panic selling? 

What is your opinion on this company? Let me know in the comment below.

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Cheers and stay healthy peeps! 

All information provided here should be treated for informational purposes only. It is solely reflecting author's personal views and the author should not be held liable for any actions taken in reliance on information contained herein. 

No buy call. No sell call. No bullshit. Only content.