Is share buyback really beneficial to the company? 11 Facts about Share Buyback

Is share buyback really beneficial to the company? 11 Facts about Share Buyback

Take KRONO for example, has proposed a share buyback which is pending approval at the forthcoming AGM. Krono is planning to buy back 10% of its shares in the market, equivalent to 52.2 million of shares.

Assuming an average price of RM0.70, the company would have to fund a total value of RM36.5 million either via its own cash or bank borrowings.

However, given that the total value of purchased shares should be the lower of

(i) 10% of total issued shares; and

(ii) the retained earnings balance of RM55 million in FY2019 (RM47 million in FY2018),

the company would have sufficient cash balance of RM57 million to buy back maximum of 10% of the total issued shares.

The purpose of share buyback is to reduce / cancel the purchased shares or retain the purchased shares as treasury shares and sell those shares at a higher price in future.

Normally, the board will only buy back its own shares when they deemed that the current market price is trading below the company's INTRINSIC VALUE.

So, what is the impact then?

Advantages:

1. Earnings of the company might increase if the treasury shares are then resold to Bursa at a higher price, realizing the potential gain without affecting the number of issued shares in the company.

2. P/E will decrease. As the number of shares consolidated, the Earnings per shares (EPS) will increase assuming the shares purchased are subsequently cancelled. As such, P/E ratio will decrease with the prices remain unchanged.

3. Increase shareholders' value by distributing the purchased shares as share dividends, as a reward to the shareholders.

4. Enhance investors' confidences. More often that not, if the company is willing to buy back its own shares, meaning even the Board thinks that the company is currently undervalued. And investors will be hopeful that the share price will soon reflects its true value. The investors' confidence will be further strengthened if the board of directors continue to buy the company's shares using their own money instead of company's funds.

5. Since Krono has been on its M&A spree, the company can also offer its purchased shares as a non-cash consideration when acquiring its target company. This is also another way to unlock the value of purchased shares if the share price now is higher than the price of the purchased shares. Working capital of the company can be preserved.

6. Purchased shares can be offered as VSS schemes to the employees where the employees can exercise the shares at a much cheaper price once the price has rebounded higher. This would preserve the EPS without increasing the number of shares in the company (usually exercising shares from VSS would dilute the EPS).

Disadvantages:

1. Investment opportunities might arise and if the company has used up its own financial resources to buy back its own shares, the company would have missed the rare opportunity that may emerge in the future.

2. Net asset (i.e. equity) of the company will decrease. If the company uses its own cash to buy back the shares, the assets will reduce and the purchased shares will be classified as treasury shares, which is a contra-equity account.

3. If the directors are so confident in the prospects of the company, the directors should buy more shares using their own money as the company's funds should be used for investing purposes or business expansion instead of share buyback.

4. Bottom line of the company will be impacted negatively. Interest income would reduce if the company is using cash to buy back the shares. Interest expense would increase if the company is funding the share buy back through external borrowings that bear interests.

5. Share buyback, in our perspectives, is indicating that there is no use of the excess financial resources owned by the company and is therefore wasted on buying back its own shares. However, this can be counter back if the share price is relatively low and will be resell at a higher price later in future.

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.

4. How to determine the right value for POTENTIAL growth stock like MSC?? Don't miss it! [PART 2]

Episode 4: Malaysia Smelting Corporation Berhad (MSC) [PART 2]

Today, we will be discussing about the key challenges faced by MSC and the financial aspects of MSC.

Previously in Part 1 (Episode 3), we discussed about the business model of MSC and its future growth prospects. We discussed how MSC's production capacity is set to increase as high as 50% annually from 40,000 tonnes per year to 80,000 tonnes per year.

If you missed the previous post, you may refer to the link here (would recommend you to read the previous article to have a full picture of MSC) 

Link here: https://humbledinvestor.blogspot.com/2020/05/3-is-tin-mining-sunset-industry

1. What are the weaknesses found on MSC?

Weakness here means the challenges faced by MSC. Basically, there are 2 key risk factors faced by MSC which are the (i) fluctuation of global tin prices and (ii) forex risks. However, do note that both of the risks here is non-controllable by MSC as the prices are adjusted based on macroeconomic factors.

(i) Let's talk about the global tin prices. If we look at the tin prices extracted from LME for the past 10 years (looking at a longer horizon), we noticed that the tin prices is at near to historical low level. This is identical to MSC's share price for the past 10 years. We could deduce that MSC share price correlate with tin prices. But what we should concern about is the price of tin moving forward. If the price of tin continue to go up, MSC share price will follows. And of course the price of tin would be determined by the demand and supply in the market. Let's find out more. 

According to ITA ("International Tin Association"), China, being one of the biggest importer of tin in the world, is set to import more tin and returning to normal levels of imports after reviving the economy from the COVID-19 lockdown.

Based on latest customs data, China imported 4,000 tonnes of tin-in concentrates in March 2020, an increament of 11% y-o-y while refined tin imports reached 1,180 tonnes. This has surpassed the largest monthly imports since January and February last year, indicating higher demand from China.

Due to the outbreak, Indonesian tin miner PT Timah will delay exports of refined tin and reduce its monthly output by 20% to 30% because of reduced demand. This represents the supply cut. With the recovery of demand and the supply cut by the top 2 tin miner in the world (PT Timah), we expects the tin price to slowly recover. However, no signs of production cut by MSC so far. Reasons for this may find in this article as explained by MSC's CEO himself: https://www.thestar.com.my/business/business-news/2019/09/14/mscs-tin-output-to-remain-firm-despite-global-cuts

In conclusion, we expect the price of tin to recover in the next half of 2020 provided the corona virus outbreak can be contained.

(ii) MSC is exposed to foreign exchange risks mainly in USD and SGD. The USD forex risks are minimised as majority of the purchases and sales are transacted in USD.

In order to mitigate the risks to an acceptable level, MSC uses derivatives such as forward tin contracts and forward currency contracts to manage the risks.

Besides, lack of available land for mining, short period of mining lease and small area of mining tenement granted by state authorities are some of the key challenges faced in tin mining industry in general.

2. How did MSC perform over the past 10 years?

Over the last decade, the century-old tin mining and smelting group reported five years of losses, totalling nearly RM300 million, and five years of profits, amounting to RM200 million. It suffered losses in 2008, 2010, 2012, 2014 and 2015, and made a profit in 2009, 2011, 2013, 2016 and 2017. In contrast, it enjoyed 14 straight years of profitability after it was listed on Bursa Malaysia in 1994.

Based on the chart below, briefly we can see that the net profit margin is improving. 
However, we will not go into details on the past performance. Instead, let's discuss future expected performance.

Once the new smelter in Pulau Indah ready to commence operations, the management will expect high operating costs as they will continue to operate the old smelter and new smelter in parallel (at the same time), with only one generating revenue. This is to ensure that the day-to-day operations is not disrupted by the new smelter in case of any technical issues.

MSC's CEO, Mr. Patrick Yong expects the doubling of operating expenses will affect its bottom line, until the operations at Pulau Indah stabalised which he expects would be by end of 2020.

Not only that, with the high capital expenditures spent on acquiring the new smelting facility at RM130 million, purchasing the plant for RM50 million and spending for refurbishment for RM80 million. These costs that have been incurred will be capitalised as PPE and will start to depreciate once the facility is ready to use which is expected in 2020. This will trigger depreciation charge which will further reduce the net profit although it is only an accounting impact.

3. Is the management reliable? Please discuss and analyse about the management of MSC.

This company has a little bit of history in their management profile over the last 10 years. As we gathered, there are 15 resignations happened to their board of directors over the past 4 years. This include CFO which has been changed 4 times. The reshuffle of management with NED, NINED, CEO, CFO, COO and secretary has been a good drama for the past 4 years. 

However, with Mr. Patrick Yong on board as CEO since 2016, would give the market more confidence over his management style. He was the managing director of M Smelt (C) Sdn Bhd, a wholly-owned subsidiary of MSC. He has more than four decades of experiences in global business operations in several business areas including leadership, research and development of international marketing and sales organisation.

In one of The Edge article Dec 2018, he reassured to his investors on the company's prospect and explained that when the CEO of the company is continuously buying shares but with small volume, it represents the CEO's confidence in the company. This is what he said: "Personally, I have a lot of confidence in this company. The industry’s prospects and business outlook are tremendous."

Unfortunately, he does not hold substantial interests in the company, he only holds 0.07% or 278,000 shares in MSC as 29 March 2019. 

4. How to value MSC? What is the fair value of MSC?

This time, let us look from another perspective to value the company. Previously, I have mentioned the key advantages / opportunities of MSC (after the new smelter commence its operation) which I will summarised as follows:

i) operational cost will reduce
ii) annual production capacity will increase by 50%
iii) labour cost will reduce
iv) carbon footprint will improve
v) Overheads will increase before new smelter become fully operational
vi) the land in Butterworth can either be developed or sell at a gain

I would like to focus on the last point here.

In Sept 2018, MSC and its 53% shareholder, Straits Trading (STC) have signed an MOU to jointly explore options on UNLOCKING the value of land owned by both parties in Butterworth, Penang. What is interesting here is that this land is not referring to the old smelting plant which spans 13.9 acres, but rather this land is a neighbouring adjacent land to the smelting plant totalling 26.2 acres. On a combined basis, we are looking at a combined land area of sizeable 40.1 acres.

With the MOU in place, there is a better collaboration between MSC and its majority shareholder in unlocking the value of this prime land with great redevelopment potential and maximizing the returns for both parties.

According to 2018 Annual Report, there are 3 options where both parties are considering which are:

1. joint ventures with partners (I assume is developers) to develop the land 
2. Develop the land on their own
3. Land sales

For your further information, the land is FREEHOLD land and is in close proximity to Penang Sentral which is the key transportation hub for Penang connecting railway, ferry and bus service. It also has a panaramic view of Penang Island as shown in the picture below. Furthermore, following the PTMP (Penang Transport Master Plan) implementation, the transportation infrastructure will improved significantly.

Attached is the Penang's map and the location of both land parcels.

This means that the land has the potential to be valued as TOD (transit-oriented development) which could fetch higher value compared to normal land due to appealing location to wide range of investors and developers. In Feb 2020, Mr. Patrick Yong has explained that MSC will not be involved in the development of land itself, but rather STC will take over the projects as they have the know-how and experiences in this sector. Besides, he also said the development land has been approved as "mixed development" and initial works has already started on the ground.

The Butterworth land would then be revalued upwards. As at 31 December 2018, the land held for development is valued at RM78.654 million as shown in the FY2018 Annual Report.

Net tangible asset per share of RM0.89, compared to current price RM0.715, has a upside potential of ~25%, without factoring the full operational value of the new ISASMELT smelting plant YET.

Let me know your thoughts on this and if there is any points I missed out or you would like to highlight to me. But all in all, I would think MSC has a great potential in near future and MSC is definitely a great company to invest in, at a fairly cheap price. 

Simple valuation metrics for your reference:

ROE: 9%
ROA: 4%

PE ratio: 8.54
NTA per share: RM0.92

Current ratio: 1.59 (healthy)
Dividend payout: 24% (Preserve cash for investment)
Gearing: 0.9 (High capex for new smelter)

“Today, very few people know about tin smelting. This is not something that you can start today, stop tomorrow, and then restart production the day after tomorrow as you like. If the equipment is not being used, it will start to rust. It is a very high-barrier-to-entry and labour-intensive business.” Mr. Patrick Yong explains.


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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.

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

3. Is tin mining a sunset industry? Here's 7 reasons why MSC will be a growth stock in near future [PART 1]

Episode 3: Malaysia Smelting Corporation Berhad (MSC) [PART 1]

Malaysia Smelting Corp (MSC) is the world's third-largest refined tin maker. It is currently dual listed on Bursa Malaysia and Singapore Exchange. MSC is 54.8% owned by Singapore oldest companies - The Straits Trading Co Ltd.

Today we will be discussing MSC's future growth prospect. Note that there are not many analysis (on MSC) covered by any famous blogger or fund manager / investment bank that I knew of but I think this company will be the one of the stock worth investing, either from a value investing perspective or growth investing perspective. Let's find out why.

1. What is MSC's business model?

The revenue of the company can be categorised into 3 segments:
i) tin mining;
ii) tin smelting; and
iii) sales of refined tin metal and by-products.

Tin smelting involves smelting of tin concentrates and tin bearing materials and the production of various grades of refined tin metal. However, note that less than 10% of the smelter's inputs are from MSC's own mines. The remaining 90% of tin ore (raw materials) are sourced from locally and outside of Malaysia. 

The process of tin smelting starts from the tin mines. Tin ores will be extracted from the mines and then processed into tin-in concentrates. Tin-in concentrates are then converted into refined tin metal products through the tin smelting process using the smelter.

2. What is the usage of tin and how is the demand? Isn't tin mining a sunset industry?

Tin is used in various products ranging from food packaging to smartphones, electric vehicles and solar cells.

While there is a rapid growth of solders due to wide application of tin and the rise of semiconductor industry today, there will be further usage of tin especially in the emerging lithium-ion batteries for electric vehicles. Tin metal which is recommended to be used in the batteries for electric vehicles (for example, Tesla battery pack) is mainly due to the potential increase in energy storage capacity which will then improve the charging rate of the battery. 

The increase in energy storage capability of tin leads to other areas of growth such as renewable energy generation and storage, as well as advanced computing and robotics.

The Group CEO, Mr. Patrick Yong predicted that the future demand is expected to come from new applications in energy-storage technologies. In particular, the demand will be coming from the rise of tin usage in lithium-ion batteries as more automotive manufacturers push for electric vehicles.

According to International Tin Association (ITA), tin is called the ‘spice element’ because a little of it is present everywhere in ways that are essential to our quality of life. Tin use in vehicles is a good example.

Below are the tin prices extracted from LME (London Metal Exchange) from 2015 to today:

The average tin prices are as follows (extracted from KLTM Kuala Lumpur Tin Market):

2015 - USD16,068/tonnes 
2016 - USD17,867/tonnes (11% y-o-y)
2017 - USD20,036/tonnes (12% y-o-y)
2018 - USD20,067/tonnes (0.15% y-o-y)
2019 - USD18,616/tonnes (-7% y-o-y) 

More recently tin demand has been significantly impacted by macroeconomic shocks, first the US-China trade war and now the covid-19. According to ITA, it will take some time to recover inevitably, although there are good reasons to expect a strong rebound.

Having said that, Mr. Patrick Yong said that the cost of mining will prevent tin price from falling below the global average mining cost, which he believed is around USD15,000/tonnes, for hard rock mining. In fact, ITA has predicted the upper range to be around USD25,000/tonnes. Therefore, it is not difficult to guess where the betting man is putting his money given the near-to-all-time-low tin prices. 

The longer-term future looks very promising, with very significant opportunities in new electronics technologies and in energy opening up for tin towards 2025-2030.

3. Other than the demand of tin, is there any other growth prospects for MSC?

Since year 1902, MSC has been using outdated reverbatory furnaces for tin smelting operations. The smelting plant is located at Butterworth, Penang and is now more than 100 years old. The old smelting furnaces involves a multi-stage procedures which is not operationally efficient. 

In mid 2016, MSC has acquired an existing production facility in Pulau Indah, Klang for RM50 million. The purpose for this is to relocate its smelting operations from Butterworth to Pulau Indah. Not only that, the management aimed to retrofit the smelting plant in Klang to be one of the most modern tin smelter which equipped with ISASMELT TSL (top submerged lance) technology. To be exact, when MSC bought over, it is said that they have found this brownfield opportunity whereby the plant that is being acquired is itself in the form of LEAD smelter, already installed with the latest TSL technology furnace. (As such, lower time cost needed to complete the new facility in Pulau Indah)

This is where things get a little bit interesting. 

With the cutting edged TSL technology, MSC aimed to be one of the lowest-cost smelting facilities company in the world. The ISASMELT process is a energy-efficient smelting process. The furnace uses natural gas as fuel and involves only single stage melting. With the commissioning of the new smelting facility which is expected to be on track and operational in the near term (2020), this will definitely improve the smelting process efficiencies and the operational costs will be significantly reduced.

According to Group CEO Mr. Patrick Yong, the new smelter will boost extraction yields and the annual production capacity will increase from 40,000 tonnes per year to 80,000 tonnes per year with an increment over 50%, WITHOUT incurring any additional capital expenditure going forward.

Not only that, the new furnace will be utilising renewable energy with rooftop solar panels and tapping heat from the furnaces, recycling energy from operating thermal wastage. This will significantly reduce the carbon footprint. With that, MSC will gain goodwill advantage especially dealing with European customers.

The plant in Butterworth will still be in service to ensure problem-free production. MSC expects full migration of smelting activities to the new plant to be completed by 2020. Having said that, labour costs will be significantly reduced. Reduction in manpower has resulting in laying off workers with VSS amounting to RM15 million given to 550 employees. 

In addition, the location of the new smelter is very strategic as Pulau Indah is located beside the most busiest shipping route in the world, the Straits of Malacca. Pulau Indah is  the industrial hub for many companies include Tadmax, Scientex, Kawan Food, MISC, IKEA distribution centre. The strategic location will benefit MSC as the LME (London Market Exchange) warehouse is also located at Port Klang.

However, given that the plant in Butterworth will still operate as usual before new smelter is fully operational, the management expect overheads to increase as they run two smelting plants at the same time. 

Once the move is completed, the management expects to be operationally efficient. At the same time, the land located in Butterworth can be either developed or sell off and make a handsome gain which will improve the group's cash flow and potentially a special dividend will be paid.

As a summary:

i) operational cost will reduce
ii) annual production capacity will increase by 50%
iii) labour cost will reduce
iv) carbon footprint will improve
v) Overheads will increase before new smelter become fully operational
vi) the land in Butterworth can either be developed or sell at a gain

With that, where do you think this company will be heading to over the next 5 years?

In the next episode, more information will be shared such as what are the external factors which could significantly affect MSC, how does the company performed throughout the years, what are the risks involved and how does management react to mitigate the risks? 

Management leadership, global tin prices, forex risks, mining licenses, dividend payout, competitor analysis, valuation of MSC etc will be shared in the next article.

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Lastly, for those who like to know more about TSL furnace, here is a sample video to explain what is it about:

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.

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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