Idea of the Week: A telco company with significant recurring income

Highlights

- OCK has been a beneficiary of 5G deployment in Malaysia as the group is heavily involved in the JENDELA and DNB project.

- With OCK owning more than 5,300 cellular towers, they are able to generate a sizeable recurring income by leasing. FY23 result shows that 57% of total revenue stems from recurring income.

- In FY23, revenue has surged by 17% to RM724.6 million. This we believe is the result of partial fulfilment in JENDELA orderbook and higher tenancy ratio in Malaysia.

- DE ratio has been gradually rising to 1.27 times attributed to their brownfield acquisition strategy in recent years, nevertheless maintains overall healthy financial ratios.

- We slightly prefer the OCKMK 5.380% 22Nov2030 Corp (MYR) due to the slightly higher yield and still acceptable years to maturity.

Introduction

OCK is a RM636 million market-cap (as of 18 Apr 2024) listed company in Malaysia, with its principal activities in the telecommunication network. OCK build, own and lease telecommunication towers and rooftop structures to telco operators. They also provide a range of services from network planning, design, network operations and maintenance to infrastructure management. The group has also leveraged on their local expertise to expand its footprint to Vietnam, Indonesia, Myanmar and Laos.

Own around 5,300 telco towers; As in Indonesia, focus in managed services

As at end of last year, OCK group has around 5,300 towers under their belt. Among the 5,300 towers, roughly 3,500 of the towers are located in Vietnam, while approximately 1,200 towers are in Myanmar and 600 towers are in Malaysia.

As in Indonesia, OCK’s operation in the region is focused in managed services. In fact, OCK is Indonesia’s biggest tower managed service provider with approximately 49,500 telecommunication sites in Indonesia under their care, commanding 45% of managed services market share in Indonesia.

Another country to look forward to is Laos, where OCK in October 2022 join hands with Laos’ Ministry of Finance to set up a joint venture (OCK: 70% stakes, MOF: 30% stakes) to provide telecommunication service. The primary focus there would be to build telco towers for Laos operators. Still, any tangible development on Laos’ side is yet to be seen.

Beneficiary of 5G deployment

OCK has been a beneficiary of 5G deployment in Malaysia as the group is heavily involved in the JENDELA (government’s initiative to expand Internet reach to every corner of Malaysia) and DNB project (accelerate deployment of 5G in Malaysia). This has resulted in OCK upgrading more than 160 of its existing 4G towers in populated area to support 5G service, which is leased to DNB. The group is also constructing new 5G towers for DNB. Current orderbook stood at around RM200-250 million as at Dec 2023.

For 2024, OCK foresee DNB is aiming to build around 2000 to 3000 of 5G towers for the year. The management is targeting to capture around 400 towers construction through tenders.

One reason why 5G presents an opportunity to telco companies in general is because more towers/structures are needed to cover the same amount of space 4G network can cover. This is because 5G uses higher frequency bands which have shorter range. Consequently, the expansion of 5G network would widens the playing field for companies like OCK. As shared by the management, approximately 4 5G towers/poles are needed to replace the coverage of 1 4G tower.

Due to these factors, economically, 5G connectivity is likely to be offered in urban areas only, at least in the short-term. Hence, we think OCK’s 4G offering to its telecommunication vendors in the other region shall remain operational as usual. Not to forget that when there’s a need for 5G, OCK could just upgrade their existing 4G towers.

Image 1: 5G live sites deployed in Malaysia (pink dots indicate the live 5G sites)

Source: DNB. Data as of 18 April 2024.

Recurring revenue constitutes more than half of the total revenue

With OCK owning more than 5,300 cellular towers across Malaysia, Myanmar and Vietnam, they are able to generate a sizeable recurring income by leasing. The latest FY23 result shows that 57% of total revenue stems from recurring income (tower leasing, managed services and solar renewables), which is in parallel with their past performance of deriving >50% of total revenue in the form of recurring income.

The data extracted from MARC shows that as of Dec 2023, the average remaining contract duration is 6 years for Malaysia, 5 years for Myanmar, 3 years for Vietnam and 1-4 four years for Indonesia. This would fortify the visibility of OCK’s recurring revenue stream.

Not forgetting that there is also the feasibility of OCK growing the solar renewables segment to be the third recurring revenue pillar for the group. There’s news that OCK is looking for new solar projects of 50MW in Sabah in 2025 and 60MW in Pahang in 2026. Currently, green energy and power solution segment contributes to a modest 8% of total revenue.    

Exercising caution in Myanmar’s business

In view of the political instability, OCK has opted to take a more vigilant view on Myanmar. Fortunately, from what we have gathered from OCK management team, it is business as usual in Myanmar and there’s no bad debt as their customers have continued to pay every month.

Nonetheless, the group has decided to cease taking in new orders (construction) at least for 1 to 2 years until the turmoil stabilises, despite of the keen interest for new telco towers shown by Myanmar clients like Mytel (joint venture between Burmese military – military of Myanmar and Viettel – Vietnam telecommunication enterprise).

We opine that the business in Myanmar will resume its contribution as usual as telecommunication is deemed a necessary service. Still, we don’t rule out the possibility of OCK divesting its Myanmar’s business like what Axiata Group has decided to do just early April 2024. Based on earlier annual reports, it is extrapolated that Vietnam business contributed to <20% of total revenue.

Malaysia contributed to about 60% of total revenue, followed by Indonesia and Myanmar

The bigger pie of OCK’s revenue is from Malaysia, constituting to about 60% of total revenue. The other 40% is from regions like Indonesia, Myanmar, Vietnam and Singapore. It is deduced that in FY23, Indonesia contributed to roughly 18% of total revenue, Myanmar 14% of total revenue, while Singapore and other countries contributed 18%.

Chart 1: OCK’s revenue contribution by region

As for the business segment, TNS (telecommunication network services) continue to serve as the group’s core contributor, accounting for 87% of total revenue in FY23. This is followed by green energy and power solutions at 8% and others at 5%.

Chart 2: OCK’s revenue proportion by segment 

Commendable earnings in FY23

In FY23, revenue has surged by 17% to RM724.6 million and EBITDA has increased by 14% to RM212.9 million. This is due to the revenue expansion across all segments, in particular in TNS (telecommunication network services). This we believe is the result of partial fulfilment in JENDELA orderbook and higher tenancy ratio in Malaysia. FY23 is also the highest recorded revenue in the past 6 years.

Comparatively, finance cost is 38% higher in FY23 at RM41.4 million due to the US borrowings OCK has in their account, exacerbated by the continuous depreciation of MYR ringgit. Nonetheless, the refinancing of USD borrowings from the proceed of RM300 million sukuk issuance in November 2023 will help OCK in interest saving going forward. This is exemplified in the reduction of US borrowings (shown in MYR) from RM268.7 million in 3Q23 to RM170 million in 4Q23.

EBITDA margin and net profit margin stood at 29% and 6% respectively. 

Table 2: OCK’s profit indicators

Gradually rising DE ratio, but overall healthy financial ratios

FY23 shows that OCK’s DE ratio and net DE ratio have risen to 1.27 and 0.96 times respectively. This is mainly due to the brownfield acquisition strategy OCK has adopted to increase telco tower count and the acquisition of solar farms to expand its green energy segments. But considering that debt to EBITDA is still okay at 4.75 times, we think the leverage ratio collectively is in acceptable range.

Other financial ratios paint a rosier picture. For instance, interest coverage ratio stood at a healthy 5.1 times. Notably, operating cash flow before working capital changes has expanded by 13% to RM216 million in FY23. The robust operating cash flow will enable OCK to expand through new acquisitions and meet borrowing obligations. 

Table 3: Selected credit metrics (in times unless stated otherwise)

OCK’s bond redemption centered around two years: 2028 and 2030

OCK’s bond redemption schedule is centered around two years: 2028 and 2030. In the year 2028, there’s a maturity of RM100 million, followed by another RM300 million maturing in 2030. Taking all the financial metrics into consideration, we opine there’s no short-term liquidity concern on OCK.

Chart 3: OCK’s bond redemption schedule

Risk

The political turmoil in Myanmar could potentially lead to unfavourable development in the future. In the worst case-scenario, OCK might lose revenue contribution from the country, resulting in a dent in the group’s financials by around 20%. 

Other than that, there’s customer concentration risk. Based on FY22 result, around 64% of tower leasing revenue in Malaysia is derived from U Mobile, about 76% of leasing revenue in Vietnam from VMS Mobifone and 45% from ATOM Myanmar in Myanmar. However, this is pretty common considering the oligopolistic nature of telco industry.

Our recommendation

With over half of OCK’s revenue stemming from recurring income, long-term basis leasing contract as well as telecommunication industry deemed an indispensable sector, we believe that OCK bonds represent a favourable option for investors to consider. Between the two OCK bonds trading in the market, we slightly prefer the OCKMK 5.210% 24Nov2030 Corp (MYR) due to the slightly higher yield and still acceptable years to maturity.

Table 4: OCK bond list