Why you should buy BINACOM?

Binasat Communications Bhd(BINACOM) is scheduled to be listed in ACE Market of Bursa Malaysia on next Monday, 8th January 2018. In this article, we share a few things that you might need to know about this company.

What BINOCOM does?

BINACOM is principally involved in the provision of supporting services for satellite, mobile and fibre optic telecommunications networks which includes installation and commissioning, and operations and maintenance services in Malaysia.

How much market shares does BINACOM have? Who are the major clients of the BINACOM?

The company stated that it has a 57% market share for maintaining satellite ground stations located at petrol stations and 64% market share for O&M for all satellite ground stations.

Maxis Broadband Sdn Bhd and Huawei Technologies Malaysia SdnB hd are its major customers. Maxis contributed about 49.5% to the group’s revenue for FY17 while Huawei contributed about 26.3%.

IPO Proceeds Utilisation

Source: Company prospectus

How Does The Sector Look Like?

In general, the prospects and outlook of the telecommunications network supporting services segment are POSITIVE given:

• Increase in government spending on digital infrastructure:

-Under the Budget 2018, RM1.0bn will be allocated through MCMC to develop telecommunications infrastructures and broadband facilities in Sabah and Sarawak.

-The 11th Malaysia Plan, where one of the strategies is to improve coverage, quality and affordability of digital infrastructure by expanding and upgrading broadband infrastructure which involve deployment of the High-Speed Broadband 2 and Suburban Broadband plans.

-Providers of telecommunications network supporting services are expected to benefit from telco's on-going capital expenditure, which includes upgrading, maintaining and deploying additional network infrastructure to improve their service offerings to their customers

• Increase in network equipment recalibration work amid possible spectrum reallocation exercise:

-Operators providing telecommunications network supporting services could potentially benefit as telcos could engage them to carry out network equipment recalibration work, and to install and commission new network equipment.

What Are BINACOM’s Competitive Strengths?

• Robust expertise and extensive track record

Driven by experienced management team and a vast network of 264 technical personnel, BINACOM has a proven track record of approximately 13 years, serving customers in the information and communications technology (ICT) industry, including all of the major telcos in Malaysia (either directly or indirectly through equipment suppliers), and equipment suppliers.

• Earnings visibility from recurring revenue

An average of 48.71% of its revenue is derived through its O&M services for the satellite (including uplink and downlink services), mobile and fibre optic segments for the past four financial years is recurring in nature. This provides BINACOM with some assurance of cash flow during the duration of such contracts.

• Quality management system

The group has on 31 July 2017, received the ISO 9001:2015 quality management system certification for the provision of satellite and other telecommunications engineering services (installation, testing and commissioning).ISO 9001 is a standard that set outs the requirement for a quality management system. This certification provides customers with assurance that BINACOM adheres to quality standards and processes upon provision of supporting services.

How Does BINACOM’s Financials Look Like?

• Net profit

-Net profit experienced double-digit growth on the back of double-digit growth in revenue from expanding customer base. More than 45% of total revenue is recurring in nature.

• Profit margin

-Gross profit margin stayed above 25% for the past three financial years. Other than roping in higher margin work orders, improvement in profit margin was also due to cost reduction efforts initiated. This included resource sharing and insourcing to achieve costs effectiveness and resource efficiency.

• Gearing

-The group's gearing level is guided to reduce from 0.34x to 0.14x post IPO.

What Is BINACOM’s Fair Value?

While it is fairly hard to derive a fair value for BINACOM given the lack of comparables in the Malaysian telecommunication space (as it is serving a niche segment), we can probably get a sense of where it should be trading using the industry average PE.

Case in point, the average 2018 PER multiple for telecommunication segment is about 27.6x. Based on BINACOM’s IPO price of RM0.46 per share and its 2017EPS of RM0.038 per share, we can derive a PER of 12.1x. This suggests a potential valuation rerating given the huge valuation differential as compared to the industry average.

On the flip side, the closest comparable that we can be looking at is OCK group berhad, another company that principally involved in telecommunications network services. Its shares have been trading at PER of 27x, a PER that the big players like MAXIS, AXIATA and DIGI are currently trading at. As such, it shows that the horizontal competitor, BINACOM is offering at a relatively cheap valuation given its recurring business model.

Using a conservative PER multiple of 16x, we believe the fair value for BINACOM can be close to RM0.61 per share using its 2017EPS. As such, we believe there is high chance of valuation rerating post listing, suggesting a huge upside potential for BINACOM.

Some Market Rumours (Collected from forums)

• Limited share allocation to institutional players like fund houses, which may lead to aggressive bidding after the stock goes listed. This is not totally unreasonable given the public portion of its initial public offering (IPO) was oversubscribed by 34.23 times.
• The company has been actively bidding for some projects from federal government, the speculation source stated that the company is quite close to a successful bidding
• The stock has gone under the radar of some savy investors

Disclaimer: The views above are opinions based on facts and subjective judgement. We do not take any responsibility for any actions rely on the information discussed.

中文版：为什么（周一）8-1-2018 上市的BINACOM是值得投资的选择？