by Sharon Kong, sharonkong@theborneopost.com. Posted on October 1, 2013, Tuesday

KUCHING: Instacom Group Bhd (Instacom) is set to be a major beneficiary of the rollout of long-term evolution (LTE) networks and Universal Service Provision (USP) projects in East Malaysia, backed by a decent orderbook of RM300 million.

According to Chan Jit Hoong of RHB Research Institute Bhd (RHB Research), 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. Generally, the company aspires to become a telecom infrastructure service provider.

Given its strong market credentials, Chan opined that Instacom is a potential beneficiary of the rollout of LTE services and USP fund projects in Sabah and Sarawak. The company, is also looking to venture into the telecom infrastructure leasing market which offers superior margins.

“We believe Instacom is well-positioned to benefit from the rollout of LTE networks give its entrenched relationship with the mobile operators.

“We gather that each mobile operator is looking to invest RM400 million to RM500 million over the next three years to expand LTE coverage and capacity,” Chan highlighted.

Instacom’s key customer, Maxis Bhd, is likely to expand its network aggressively to upsell more 4G services to its premium customers. As such, the smart partner relationship with the incumbent mobile operator (in the southern and eastern region) should result in more contract wins for Instacom.

The USP fund projects may also provide a strong avenue of growth for Instacom, as the government looks to narrow the digital divide.

To recap, the local telco regulator had in 2009 introduced a coverage target (known as T3) with the objective of enhancing cellular coverage nationwide, targeting rural areas and villages with population density of below 80 persons per square kilometre (sq km). Sabah and Sarawak are two key underserved states with sub-optimal coverage.

“We believe Instacom’s strong footing and leading position in East Malaysia provide it significant advantage over its competitors in securing the said USP projects.

“As of December 31, 2011, the USP reserve fund stood at RM7.3 billion,” Chan highlighted.

To further expand its business, Instacom is looking to penetrate into the building and leasing of telecommunications infrastructure, such as transmission towers and fibre optic lines.

“We view this move positively, as it creates an additional and long-term recurring revenue stream for the company. As a third party operator of these assets, Instacom stands to benefit from multiple tenancy agreements while it simultaneously helps its telco customers lower their overall capital expenditure (capex) and operating expense (opex).

“We regard this as a compelling business model, as it establishes a symbiotic win-win relationship between the telcos and the company,” Chan added.

Recently, Instacom was awarded a RM205 million three-year contract by 1M Utama Sdn Bhd (1M Utama) to supply, install, test and commission telecommunication infrastructure and engineering works in Sarawak. With this contract in hand, Chan estimates that the company’s current orderbook is around RM300 million.

Overall, with its tower and fibre businesses and Sarawak jobs from 1M Utama, RHB Research forecasted financial year 2012 to 2014 (FY12 to FY14) revenue compound annual growth rate (CAGR) of 53 per cent, while earnings before interests, taxes, depreciation and amortization (EBITDA) margin is expected to hover at the elevated 20 per cent level while profit margin should remain high at around 17 per cent

“With these in mind, we expect to see strong earnings uplift for the company in the next two years (two-year CAGR of 54 per cent),” Chan projected.

All in all, the research arm liked Instacom for its bright prospects within the telecommunications space and its attractive valuation at the current price.

As such, RHB Research initiated coverage on Instacom with a ‘buy’ recommendation and fair value of RM0.51 per share in view of the stock’s potential 82 per cent upside.

Read more: http://www.theborneopost.com/2013/10/01/instacom-a-major-beneficiary-of-lte-usp-projects-in-sabah-and-sarawak/#ixzz2gU8K5Ju5