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.

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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, optimization, deployment and maintenance services

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Source: RHB