Instacom expects turnaround in FY2015

-A +A

SARAWAK-BASED telecommunications infrastructure player Instacom Group Bhd saw its share price drop to a new low of 14.5 sen last Tuesday, and its market capitalisation fall by more than half to RM101.8 million compared with last year.

The turn in fortunes was sudden. The group’s share price touched over 38 sen in mid-2013, from 20 sen at its debut in October 2012, after it took over the listing status of troubled I-Power Bhd.

Two years into its debut on Bursa Malaysia’s ACE market, the pressure on revenue is being reflected in Instacom’s financials.

Based on filings with Bursa Malaysia, Instacom fell into the red in the third quarter ended Sept 30, 2014, with a net loss of RM2.02 million, while its nine-month cumulative earnings fell to RM4.19 million from RM22.33 million the previous year, as revenue halved to RM51.89 million from RM102.95 million.

Market observers blame Instacom’s poor showing on the delay in the rollout of projects in Sarawak, notably the RM205 million contract the group had received in May 2013 to build telecommunications infrastructure related to the 1BestariNet project.

As recently as Nov 10, 2014, the Ministry of Education had said that YTL Communications Sdn Bhd, the main contractor for 1BestariNet, had yet to obtain the necessary permits for the construction of telecommunications towers in Sarawak, Penang and Kelantan.

1BestariNet is under the purview of the Ministry of Education. The project aims to enhance the learning process in schools through wider use of the Internet, and involves the upgrading of software and hardware, including telecommunications infrastructure, especially in rural schools.

In response to questions from The Edge, Instacom declined to comment on 1BestariNet. However, it attributed the group’s poor financial performance to unforeseen external factors.

“The operating environment this year has been very challenging as the telcos have been rather slow in issuing work orders — which is an industry-wide development. The value of the work orders issued [was] also significantly lower than the previous year,” the company said.

It added that the reduction in the value of work orders was mostly driven by a squeeze in call rates, which in turn affected the telcos’ earnings.

This had a trickle-down effect on tower contractors and subcontractors such as Instacom, which are now under some pressure to replenish their order books as well as seek new income sources.

The group’s civil and mechanical engineering division, which is its main revenue contributor, delivered RM42.92 million for the first nine months of its financial year 2014 (9MFY14), or a 34% drop from RM65.58 million in 9MFY13.

“Some of our customers, who are vendors to the telcos, have been slow in issuing work orders as they are affected by the telcos’ recent cost reduction initiatives,” the group said.

Likewise, Instacom’s two other core divisions — telecommunication equipment installation (TI) and turnkey build and finance (TBF) — saw y-o-y revenue declines of 64% and 84% respectively over the ninemonth period due to lower demand from customers.

However, Instacom could see a reversal in fortunes next year, provided there is a revival of contract flow in the telecommunication segment.

The government continues to actively push for greater Internet penetration with its high-speed broadband access initiative, particularly in rural areas such as in major parts of Sarawak.

In May this year, the Malaysian Communications and Multimedia Commission (MCMC) had called a tender for the construction and delivery of some 400 towers worth approximately RM300 million.

Of the 400, Instacom says, “Sarawak was given a large share of 149 towers. Instacom had participated in the aforementioned tender exercise and is optimistic of our chances, considering our strengths and home base in Sarawak.”

Meanwhile, Instacom recently proposed the acquisition of a 35% stake in Neata Aluminium (M) Sdn Bhd for RM58 million, to be satisfied by the issuance of new shares at 19 sen each to the vendor.

Neata would provide a profit guarantee to Instacom of not less than RM34 million for the next two financial years (FY2015 and FY2016), or an average of RM17 million per year.

Instacom says it will have strategically diversified into new areas with this acquisition “as the tower business tends to be cyclical at times” and is “confident that 2015 and 2016 will be positive years for the group”.

At 14.5 sen, Instacom’s stock has fallen by 46% year-to-date and could pique buyer interest as it is trading below the 19 sen issue price for the Neata acquisition. Still, the recovery of its core business in the telecommunications infrastructure segment and the sustainability of Neata’s performance after the two-year profit guarantee period would be crucial.

Meanwhile, the issuance of 309.47 million new Instacom shares for the Neata deal would increase Instacom’s outstanding shares significantly to 1.01 billion from 702.25 million presently, raising concerns of dilution should earnings fail to catch up.

 

This article first appeared in The Edge Malaysia Weekly, on December 15 - 21, 2014.