Binasat Communications Berhad (BINACOM) will be raising RM39.6m with a market capitalisation of RM119.6m. The proceeds arising from the IPO is mainly for setting up a teleport, enhancing operational efficiency and regional expansion. With nearly half of its turnover on average derived from recurring income, this will provide earnings certainty during the contracts’ duration. With a targeted PER range of 11.7x-14.5x, we have derived our fair value range of RM0.46-RM0.58.

BINACOM - telecommunication support services specialist with a proven track record in supporting services across satellite, mobile and fibre optics networks. With the group’s edge of having diverse capabilities, it has become a strong telecommunication networks supporting services partner to MAXIS, U Mobile and HUAWEI.

Dominate market share. The group is currently servicing c.1,750 VSAT (Very small Aperture Terminal) ground stations installed at petrol stations, 4,500 overall VSAT ground stations, and 11,000 mobile BTS sites, representing a market share of 57%, 64% and 28% in the respective area. Note that, VSAT is generally a two-way satellite ground station with a dish antenna that is usually less than three meters in diameter. It is mainly used to connect remote sites for specific industries, applications or geographic areas.

Recurring Income for sustainability. The group’s recurring income makes up of c.49% of total revenue on average, widely owing to its operations and maintenance services for the satellite (including uplink and downlink services), mobile and fibre-optic segments. The recurring income contracts’ duration, however, appears short as it merely comes in at an average 1-4 years.

Fund raising for future expansion. BINACOM expects to raise RM39.6m based on 86.0m new shares at IPO price of RM0.46/share. The IPO proceeds will be utilized mainly for funding of new teleport facility, which could give rise to new satellite services offerings while reducing internal reliance on overseas satellite downlink services. Likewise, existing O&M and fibre optics services capability will be enhanced through establishment of new warehouse, R&D facilities as well as procurement of new vehicles and equipment.

Earnings forecast. Although half of BINACOM’s earnings depends on telecom projects flow (which tends to fluctuate), we expect the group’s top-line to perform better than the country’s GDP growth in FY18. However, its staff costs and depreciation are expected to trend higher in tandem with the higher project flow coupled with more assets acquired. All in, we expect the group’s net profit to grow by 3% in FY18 (to RM10.3m) on the back of 6.8% YoY climb in revenue coupled with similar GP margin of 37%. Although management has yet to outline the dividend policy, we expect BINACOM to continue rewarding its shareholders. By assuming a similar dividend pay-out ratio of c.20% (similar to FY17) in FY18, BINACOM is expected to declare a DPS of 0.8 sen, translating into 1.7% dividend yield.

Target price of RM0.46-RM0.58 based on targeted blended PER range of 11.7x-14.5x. We have decided to use the blended PER basis to better reflect the group’s business nature as the mobile segment tends to enjoy higher PER post listing. Thus, with a segmental mix of 60%/40% ratio (60% on non-mobile (i.e. VSAT, which should be value based on the FBMSC’s valuation) and 40% on the mobile segment), we have derived a blended PER of 11.7x-14.5x (implied a targeted fair value of RM0.46-0.58 range) for BINACOM.

Risks to our call include: (i) higher-than-expected project flows and margins, and (ii) impact from the on-going spectrum reallocation plan.

Source: Kenanga Research - 8 Jan 2018