MARC Ratings has assigned a rating of AA-_IS/Stable to OCK Group Berhad’s proposed RM400 million Tranche 1 to be issued under a proposed RM700 million Sukuk Murabahah Programme.

 

OCK is principally involved in telecommunication network services (TNS) that comprise tower leasing, provision of full turnkey solutions, and managed services. 

The rating considers OCK’s stable operating performance and cash flow visibility, underpinned by long-term contracts, largely predictable expenses and strong market growth drivers. The rating also incorporates the long-term growth prospects for its TNS segment as mobile telecommunication operators (telcos) continue to densify their networks to increase coverage and capacity that would lead to an increased demand for tower infrastructure. OCK’s diversification into solar energy backed by long-term power purchase agreements (PPA) is also positive for its business profile. These strengths are moderated by the cross-border risks and, to a lesser extent, contract and land lease renewal risks.

As at end-2022, OCK had 5,266 telco towers and 7,027 tenancies, of which Malaysia accounted for 566 telco towers and 797 tenancies, Vietnam 3,500 telco towers and 4,550 tenancies, and Myanmar 1,200 telco towers and 1,680 tenancies. Its tenancy ratio stood at 1.37x (2019: 1.28x). It also manages services for telcos in Malaysia (11,300 sites) and Indonesia (49,200 sites) where it has an estimated market share of 45%. MARC Ratings notes that as the group has sizeable presence in Vietnam, Indonesia and Myanmar, it remains exposed to political as well as transfer and convertibility (T&C) risks. Of greater concern is the exposure in Myanmar, which is under sanctions by the US and Western European countries and as a result, Myanmar’s economy remains under strain owing also to political and social conflicts. We understand that in Myanmar, OCK has limited its presence to its current telco tower projects only and for which payments being received are denominated in USD.  

MARC Ratings has carried out a sensitivity analysis excluding contributions from Myanmar and Vietnam, and applying a lower operating margin of 30%. We deem the resulting estimated net cash flow as adequate for debt service. We project OCK’s cash flow leverage, as expressed by finance-to-EBITDA  ratio (FER), to be below 4.0x over the next five years. Malaysia remains a key revenue generator, accounting for 60% of revenue in 2022, while Indonesia contributes to 16% of revenue. Overall, we draw comfort from cash flow visibility from locked-in contracted revenue that is typically 10-15 years in initial length for built-to-suit tenancies and 3-10 years for co-locations. As of end-2022, the average remaining contract life was seven years for Malaysia (Vietnam: four years; Myanmar: 10 years). In Indonesia, contract tenures range from one to four years. 

OCK’s diversified recurring revenue from tower leasing, managed services, and solar renewable energy, accounting for about 60% of total revenue, is viewed positively. While client concentration is high, as is typical for tower players given the generally oligopolistic nature of the telco industry, the risk is mitigated by OCK’s longstanding relationships with clients, high switching costs and the critical nature of its services. 

Borrowings (excluding lease liabilities) stood at RM609.3 million as at end-June 2023, and are projected to peak at around RM720 million in 2027 over a 2023-2027 forecast horizon. We estimate debt-to-equity (DE) ratio to be highest at about 0.9x in 2024 from 0.8x currently. OCK projects its FER to improve to around 2.3x as at end-2023 (end-2022: 3.1x) and to reduce further towards 1.1x by 2027. Under MARC Ratings’ sensitised case that also assumes a lower EBITDA margin of 30% over the forecast horizon, OCK’s projected FER of not more than 4.0x is viewed as manageable. 

The rating has factored in the transaction structural features that include restrictions on additional indebtedness via a maximum FER of 5.0x. Assuming a full drawdown of the Sukuk Murabahah Programme, FER would hit highest at around 4.5x, although no such additional leverage is currently contemplated. The structure also includes a liquidity mechanism through a Finance Service Reserve Account (FSRA) sized to the following three months’ debt service to help mitigate liquidity risk. OCK is seeking to mitigate forex risk as about 48% of its debt is denominated in USD as of end-June 2023. Proceeds raised from the issuance of Tranche 1 of RM400 million will be largely utilised to refinance these loans (USD64 million or approximately RM292 million). 

The stable outlook reflects OCK’s high cash flow visibility and strengths from a strong growth outlook for the tower industry, supported by telcos’ continuing investments in their networks to increase coverage and capacity, and by the government’s telecommunication infrastructure drive. The stable outlook also reflects our expectations that EBITDA leverage will be maintained below 5.0x.  

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 it operates in.