We  are  turning  cautious  on  Instacom  given  that  two  of  its  major shareholders  had  pared  down  their  interests  in  the  company.  With limited  visibility  on contract flows  and to err on the side of caution,  we cut our FY13/FY14 forecasts by 14%/29%  respectively. We downgrade the  stock  to  NEUTRAL  (from  BUY),  with  a  lower  MYR0.29  FV  (from MYR0.51), based on a 10x FY14 P/E.

• Share/warrant  selldown.  In  the  last  two  months,  the  public  faces  of Instacom  –  Anne  Kung,  CEO  and  Thomas  Ngu,  director  of  sales  and project  management  –  had  reduced  their  stake  in  the  company.  We gather that Anne Kung’s 14.5% equity interest in Instacom is unchanged,while Thomas Ngu pared his stake to 7.8% (from 14.5%). However, both had  disposed  of  all  of  their  warrants  (collectively,  29% or 102m  units). The  other  two  major  shareholders,  Chan  Chuck  Yan  and  Wong  Say Khim, did not participate in the selldown.
• Selldown by insiders.  We are alarmed  by  the recent development  as Anne Kung and Thomas Ngu are important individuals at  Instacom  from the  operating  perspective.  When  contacted,  they  were  not  able  to provide  satisfactory  explanations.  Hence,  we  are  adopting  a  cautious stance on the company and its prospects going forward.
• Forecasts.  Given  limited  visibility  on  the  group’s  contract  flows  and erring  on  the  side  of  caution,  we  remove  the  fibre  contribution  of MYR25m-26m and MYR205m worth of jobs from 1M Utama SB from our financial model. We cut our FY13/FY14 forecasts by 14%/29%, as these job wins in 2H13 as guided by Instacom have yet to materialise .
• Risks.  Key  risks  are:  i)  growing  trend  among  telcos  to  share  their networks, ii) regulatory and execution risks  in setting up its infrastructure assets, and iii) a slower-than-expected takeup of its services.
• Valuation & recommendation.  Following the downward revision  in our forecasts  and  ascribing  to  a  lower  P/E  multiple  of  10x  (from  13x)  on FY14  EPS,  we  derive  a  lower  MYR0.29  FV  (from  MYR0.51).  We incorporate a higher discount factor of 50% (from 30%) against the target P/Es  of  local  mobile  operators  and  regional/global  tower-related companies of  about 20x  to reflect its  limited  business visibility.  All in, we downgrade the stock to NEUTRAL (from Buy).

• We remove the fibre contribution of MYR25m-26m and MYR205m worth of jobs from 1M Utama SB from our financial model

Financial Exhibits

SWOT Analysis

Company Profile
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, optimisation, deployment and maintenance services.

Recommendation Chart

Source: RHB