30 JEWELS 2013 Edition
52-wk Price low/high (MYR) 0.22 - 0.43
¨ A strong end-to-end telecommunications network service provider in East Malaysia
¨ Potential beneficiary from the rollout of LTE services and USP fund projects in Sabah and Sarawak
¨ Looking to venture further into the telecommunications infrastructure leasing market
¨ Robust revenue and earnings outlook for the next few years
¨ Buy, with TP MYR0.46, based on 13x FY14F EPS
Instacom Group (INST) is an end-to-end solutions provider for the telecommunications industry with more than 10 years of experience. It debuted on the ACE Market of Bursa Malaysia in Oct 2012 via the reverse takeover (RTO) of I-Power. Notably, the Company has a strong foothold in East Malaysia and its core competencies revolve around network planning, design, optimisation, deployment and maintenance. Instacom aims to venture further into the telecommunications infrastructure leasing market to create a significant recurring revenue stream as well as for portfolio diversification.
Riding the 4G wave. The Malaysian Communications & Multimedia Commission (MCMC) had in Dec 2012 awarded the 2,600MHz 4G spectrum to eight companies. We believe Instacom is well poised to benefit from the rollout of LTE (Long-Term Evolution) services as each operator is looking at investing between RM400m-RM500m over the next three years. We believe the Company’s key customer, Maxis (Sell, FV: MYR5.90), is likely to expand its network quickly and upsell more 4G services to its premium customers in a bid to better monetise data. Given that Instacom is one of three companies under the Maxis’ Smart Partner Program, the relationship may result in more contract wins from the incumbent mobile operator.
Milking the USP reserve fund. The Universal Service Provision (USP) fund may also provide an avenue of growth for Instacom, as the Government, through MCMC, looks to narrow the digital divide gap between the urban and rural communities. Sabah and Sarawak are two key states that are currently underserved. We believe that with its strong footing and leading position in East Malaysia, Instacom has an advantage over its competitors in securing more projects. As of 31 Dec 2011, the USP reserve fund stood at MYR7.3bn, a massive amount to be tapped upon.
Turning into a telecommunications infrastructure service provider. To expand its business, Instacom is looking to penetrate further into the building and leasing of telecommunications infrastructure, such as transmission towers and fibre-optic lines. We view this move positively, as it creates an additional and long-term recurring revenue stream for the Company. As a third party manager of these assets, Instacom is poised to benefit from multiple tenancy agreements while simultaneously helping its telco customers lower their overall capex and opex. We think that the tower business is a compelling business model, as it establishes a symbiotic win-win relationship between the telcos and the Company.
Sizeable orderbook of MYR300m. Recently, Instacom was awarded a MYR205m three-year job from 1M Utama SB to supply, install, test and commission a telecommunications network, complete with infrastructure works, in Sarawak. With this contract in hand, we estimate the Company’s current orderbook at approximately MYR300m.
Company Report Card
Latest results. Given the recent completion of the RTO of I-Power, q-oq and y-o-y financial comparisons will not be meaningful. That said, we are encouraged by Instacom’s 1QFY13 results, as revenue and core profit for the quarter have already made up 33% and 44% of its respectively FY12 numbers. As 2H is typically stronger, we expect its FY13 results to potentially surprise on the upside. As part of the RTO exercise, the Company’s vendors have a FY13 profit guarantee of MYR15m.
Balance sheet / Cashflow. Instacom’s net gearing is manageable at 0.6x and supported by its strong operating cashflow generation, which had been in positive territory for the past four years. Moreover, the fact that telcos are good paymasters is a plus point.
ROE. ROE is expected to be in the region of 13% to 15%.
Dividend. Given that Instacom is still at a growth stage, we do not expect any dividends for the next few years.
Management. Led by two major shareholders, Anne Kung and Thomas Ngu, who collectively own a 29% stake in the Company.
RecommendationOur fair value for Instacom is MYR0.46, based on a P/E multiple of 13x on FY14F earnings. This implies a forward EV/EBITDA of 12x. We think the valuation is fair, given that local mobile operators are trading at about 20x forward P/E while regional/global tower-related companies are trading at an average forward EV/EBITDA of 11x. All in all, we like the company for: i) its strong growth prospects within the telecommunications space, ii) its pool of recurring earnings, which provide earnings certainty, and iii) its attractive valuations based on the stock’s current price.