MARC Ratings has assigned a preliminary short-term rating of MARC-1_IS to OCK Group Berhad’s (OCK) proposed Islamic Commercial Papers (ICP) Programme of RM500.0 million in nominal value. The rating agency has concurrently affirmed its AA-_IS/Stable rating on OCK’s RM400.0 million Tranche 1 Sukuk Murabahah under its RM700 million Sukuk Murabahah Programme. As at end-February 2024, the outstanding amount under the Sukuk Murabahah Programme stood at RM400.0 million. 

The long-term rating incorporates OCK’s improving operating performance, its solid track record in the telco industry, its recurrent cash flow generation from locked-in contracts, and its potential to further strengthen its solar energy business. The ratings are, however, tempered by concerns about potential increase in leverage, contract and lease renewal risk as well as cross-border risk arising from its regional expansion. 

During the review period, MARC Ratings notes that OCK’s key business line — telecommunication network services (TNS) comprising mainly tower company (towerco), construction, installation and testing of telco equipment (turnkey solutions), and maintenance of telco networks (managed services) — has continued to perform well, accounting for about 87% of group revenue in 2023. Number of towers and tenancies grew by around 4.4% and 5.7% y-o-y. OCK had a total of 5,500 tower sites and 7,430 tenancies as at end-2023 (Malaysia: 650 towers and 987 tenancies; Vietnam: 3,650 towers and 4,763 tenancies; Myanmar: 1,200 towers and 1,680 tenancies). Its managed services portfolio for telcos in Indonesia and Malaysia grew by 3.3% y-o-y to 62,500 sites (Indonesia: 51,200; Malaysia: 11,300). Its turnkey solutions segment has also benefitted from the increase in Malaysian government-related projects with revenue rising by 10.7% y-o-y in 2023. 

The rating agency opines that OCK’s solar energy business — backed by long-term power purchase agreements with Tenaga Nasional Berhad ranging from 21 to 25 years — is credit positive for its business profile given the segment’s strong growth prospects. OCK, which currently owns 29 solar farms, an increase from 22 solar farms in 2022, is vying for new solar power projects of 50MW in Sabah in 2025 and 60MW in Pahang in 2026.

MARC Ratings notes OCK’s presence in the region, particularly Myanmar, poses political as well as transfer and convertibility (T&C) risks. However, OCK had limited its presence in Myanmar to only telco tower projects for which payments denominated in US dollars are being received. Additionally, as contribution from Myanmar remains modest, accounting for 12% (or RM86.5 million) of total revenue in 2023, any disruption in operations is not expected to materially impact OCK group. The rating agency also draws comfort from the fact that Malaysia remains the largest revenue contributor, accounting for 60% in 2023, followed by Indonesia with 19%. 

In terms of contract renewal risk, the high switching costs, and the impact on network operations from disruptions remain a strong deterrent to termination. Moreover, with surging data demand and the widening of 5G coverage, the need for more towers and fibre optic connections has become more pressing which should support growth of new towers and contract renewals of existing ones.  As of end-2023, the average remaining contract life was six years for Malaysia (Vietnam: three years; Myanmar: five years; Indonesia: from one to four years). 

OCK plans to issue a total of RM150 million unrated sukuk from the Sukuk Murabahah Programme over 2024-2025 to fund projects under the government’s National Digital Network (JENDELA) initiatives, as well as new projects. For its RM500 million ICP programme, OCK plans to raise approximately RM400 million to refinance existing short-term trade financing and to fund working capital requirements for new projects over 2024 to 2025. Borrowings are expected to peak at around RM1.1 billion in 2025 although the drawdown for working capital requirements under the ICP would depend on winning the tenders for the new projects. 

Under MARC Ratings’ sensitised case, the debt-to-equity (DE) ratio is expected to increase to around 1.05x in 2025 but expected to decline thereafter with deleveraging supported by top-line growth including the new projects which are expected to generate revenue of around RM2 billion between 2024 and 2028. Gross finance-to-EBITDA  ratio (FER) under the base case is projected to be around 2.4x at end-2024. Under a sensitised scenario excluding contributions from Myanmar and Vietnam, assuming debt levels as base case and EBITDA margin of 30% over the forecast horizon, credit metrics are assessed as adequate, with FER below 4.0x, within the covenanted 5.0x. Meanwhile, the issuance of the ICP exposes OCK to rollover risk, which is mitigated by the group’s financial flexibility.

The stable outlook assumes OCK will broadly maintain its cash flow metrics, stemming from the strong growth outlook for the telco industry and ability to generate healthy cash flow.

Any upgrade would be led by stronger and sustained improvement in its business and financial profiles. The rating and/or outlook could be revised downwards on sharp deterioration in cash flow metrics and/or heightened operational risks in the countries in which it operates.