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Monday, September 30, 2013

Instacom Group - 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

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