OCK’s expansion into RE to increase gearing

PETALING JAYA: OCK Group Bhd’s decision to invest in Solarpack Asia Sdn Bhd (SPKA) via 1,000 redeemable preferential shares (RPS) is being viewed cautiously by analysts, as it will raise the company’s gearing levels while contributing minimal income.

SPKA owns a 49% stake in Solarpack Suria Sungai Petani Sdn Bhd (3SP) which has a 116 megawatt (MW) large-scale solar (LSS) facility in Kedah, while the remaining 51% is held by JKH Renewables Sdn Bhd.

The deal values SPKA at an indicative enterprise value of RM350mil.

The LSS plant has a 21-year power purchase agreement with Tenaga Nasional Bhd and achieved commercial operation in March 2022.

In its financial year 2023 (FY23), 3SP posted revenue and net profit of RM40.6mil and RM30.5mil, respectively, with the latter boosted by a one-off tax credit of RM27.2mil.

“While we can understand OCK’s motivation to venture into renewable energy, we are negative on this deal, mainly due to the absence of key information and low visibility on investment returns for the RPS,” Kenanga Research said in a report on OCK.

“We will only be able to accurately assess the deal’s financial impact when more details, including the investment outlay, are revealed,” the research house added.

Hence Kenanga Research has kept its “market perform” call on the company and target price of 45 sen a share.

OCK said it would use internal funds and/or bank borrowings to fund the investment.

Kenanga Research noted OCK’s borrowings are expected to increase by RM91mil and raise its gross gearing to 1.15 times from 1.04 times in FY23.

The proposed investment also comes when OCK’s core telecoms network services business continues to face headwinds, with sluggish order book replenishment and declining outstanding orders as the first 5G network nears completion.

RHB Research, meanwhile, said it was more positive on the proposed deal as it expected OCK to benefit from additional recurring revenue and earnings from the investment and adds to its renewable energy portfolio.

The research house noted OCK now owns 29 solar farms with a combined capacity of 14MW, mainly under the government’s feed-in-tariff programme.

However, the revenue contribution from RE remains marginal, at under 5%.

Like Kenanga Research, RHB Research has maintained its forecasts and “buy” call for OCK with a target of 70 sen a share, pending further clarity from OCK’s management on the mechanics of the transaction.

The deal is expected to be completed in the second quarter of next year.