Saturday, October 5, 2013

Instacom Group - Moving Up The Ranks

Instacom Group -
Price Target:0.51
Last Price:0.295
Moving Up The Ranks

We  initiate  coverage  on  Instacom  with  a  BUY  recommendation  and  FV of  MYR0.51.  The  company  is  a  major  beneficiary  of  the  rollout  of  LTE networks  and  USP  projects  in  East  Malaysia,  backed  by  a  decent orderbook  of  MYR300m.  Earnings  growth  is  likely  to  see  a  new  leg  up with the company venturing into the telco infra lease business. We like Instacom for its good earnings prospects and undemanding valuations.

- A  small  cap  telco  infra  play.  Instacom  is  an  end-to-end  solutions provider for the telecom industry and has all the main players in the local telecom industry, including telecom equipment vendors and state-backed companies, as its customers. The company aspires to become a telecom infrastructure service provider.

- Beneficiary  of  LTE  rollout  by  mobile  operators.  Given  its  strong market  credentials  Instacom  is  a  potential  beneficiary  of  the  rollout  of LTE  services  and  Universal  Service  Provision  (USP)  fund  projects  in Sabah  and  Sarawak.  It  is  also  looking  to  venture  into  the  telecom infrastructure  leasing  market  which  offers  superior  margins.  The company has a sizeable orderbook of around MYR300m.

- FY12-FY14  earnings  CAGR  of  54%.  We  are  forecasting  FY12-FY14 revenue  to  grow  at  a  CAGR  of  53%.  EBITDA  margin  is  expected  to hover  around  the  elevated  20%  level  while  profit  margin  should  remain high at ~17%. We expect to see strong earnings growth for the company in the next two years (2-year CAGR of 54%).

- Risks.  Key  risks  to  earnings include: i)  the  growing trend  among  telcos to  share  their  networks,  ii)  regulatory  and  execution  risks  in  the  setting up of infrastructure assets, and iii) a slower-than-expected take-up of its services.

- FV of MYR0.51. We value the stock at a 13x FY14 P/E. This is based on a 35% discount to the P/Es of local mobile operators and regional/global tower-related companies, which trade at ~ 20x forward P/E. The discount reflects  its  significantly  smaller  operations  and  share  illiquidity.  We  like the  company  for  its  strong  earnings  prospects  within  the telecommunications space as well as its undemanding valuations.   The stock is one of RHB’s top small cap picks for 2013. BUY.

Source: RHB

Publish date: 30/09/13

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