1 day say sell 1 day say buy???
Instacom’s 9MFY13 earnings of MYR22.3m beat expectations, thanks to higher than expected revenue recognition although receivables swelled.The company’s operating cash flow also turned negative. We raise our FY13/FY14 net profit forecasts by 13%/4% and lift our FV up a tick to MYR0.30 (from MYR0.29). Maintain NEUTRAL as the strong earnings should mitigate concerns on the selldown by major shareholders.
- Above expectations. We were surprised by the good set of financials reported by Instacom as two of its major shareholders-cum-key personnel had recently reduced their stake in the company (see our 19 Nov report, Turning Cautious). YTD, its 9M13 earnings made up 92% of our full-year forecast (comparable 2012 numbers are not available as the reverse takeover of I-Power was only completed in Oct 2012).
- Digesting the numbers. We understand that 3Q13 revenue was strong due to increased CME works, along with the commencement of a fibre project in Johor and MYR205m worth of jobs from 1M Utama SB (FP1U). However, these were booked closer towards the end of the quarter, thus resulting in receivables rising 27% q-o-q. As a result, the company experienced an operating cash flow shortfall of MYR11m (2Q13: +MYR16m).
- Forecasts & risks. We raise our FY13/FY14 net profit forecasts by 13%/4% respectively as we now build in more CME works and a higher margin assumption. Note that we had earlier omitted any contribution from FP1U as our earlier checks with management back in October indicate that this has yet to materialize. Hence, the higher 3Q13 revenue justification provided was a pleasant surprise. The key risks are: i) execution risks in setting up Instacom’s infrastructure assets, and iii) a slower-than-expected take-up for its services.
- Valuation & recommendation. Following the upward revisions to our forecasts, we lift Instacom’s FV slightly to MYR0.30 (vs MYR0.29), pegged to an unchanged 10x FY14 P/E. We would turn more positive on the stock should contributions from FP1U improve further and accompanied by better collection. Maintain NEUTRAL as the strong earnings should lift sentiment on the stock notwithstanding the earlier selldown by major shareholders. We advise investors to tread with caution when investing in the stock.
Instacom Group is an end-to-end solutions provider for the telecommunication industry. The company has a strong foothold in East Malaysia and its core competencies revolve around network planning, design, optimization, deployment and maintenance services