Opcom ... Jan11

The fiber optic business is making a comeback with the surge in the mobile telephony and internet access markets in recent years …. such as the HSBB project.

With Telekom as one of its major customers, fibre optic cable maker looks set to benefit from the development of the HSBB project.

In 2009, it had secured a two year contract worth rm359 million for the supply of a passive fibre-to-the-home system from Telekom. Since then, it has gradually appreciated, but valuations continue to remain low.

At 82 sen, the stock is trading at a current PER of 7.7 times. This is comparatively lower than its regional peers which command a high PER of 41.67 times.

For six month period ended Sept 30, 2010. It posted a net profit of rm12.6 million on the back of rm65 million revenue. The net profit for the period almost matches that for the entire year ended March 31, 2010.

Opcom attributed the higher profit margin for the first half of the current year to lower overheads, efficiency gains and the sale of higher margin products.

It is virtually debt free, with cash of rm56 million as at Sept 30, 2010. Trade payables, the only liability item besides tax on its balance sheet, dropped to rm30 million as at Sept 30, 2010.

And with the two year FTTH supply contract from Telekom in hand, Opcom’s revenue stream looks secure in the coming quarters. In addition, any positive developments in the HSBB project could mean a potential re rating for the company.

Nevertheless, the stock remains a laggard. The local fibre optic market is not expected to pose a serious threat to Opcom as there are only a few players in Malaysia. The price of imported fibre optic cables is relatively more expensive than local fibre owing to high transport costs.

The elimination of tariffs under the AFTA agreement, however, could intensify competition. Tariffs on almost all products traded by ASEAN nations will be reduced and fibre optic materials are among the 1000 products included in the Common Effective Preferential Scheme.

In addition, the company’s reliance on a single major customer, Telekom, may impose a risk. Nonetheless, its dependency on Telekom for order flows is expected because the telecommunications player is the only major user of fibre optic lines in Malaysia. Opcom is believed to have reduced its reliance with the continuous rollout of new fibre optic products for both the local and overseas markets.

With the proliferation of data heavy devices such as Apple Inc’s iPhone and iPad, there will be a growing strain on cellular networks, particularly on connections between cell towers and land based networks where bottlenecks often form.

It was also reported that Maxis Bhd would be making a significant capex in its high speed fibre to the premise broadband project. All of these developments bode well for Opcom.

As Opcom’s chairman Datuk Mokhzani Mahathir states that its financial year’s performance will continue to improve on the back of accelerated deployment of Telekom’s HSBB project, and capital investment programmes by other telecommunications providers in Malaysia.

But whether the market will re rate Opcom higher when it secures more contracts from the HSBB projects and more importantly is able to develop new export markets going forward, remains to be seen.