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.
- 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
OCK Group
1. Introduction
2. Market Shares
3. Prospects
4. Financials
5. Valuation
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.
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 |
|
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.
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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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.
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