This article first appeared in The Edge Financial Daily, on November 16, 2015.

KUALA LUMPUR: Instacom Group Bhd, which is mainly involved in erecting telecommunication towers, is curbing its losses for the financial year ending Dec 31, 2015 (FY15), and expects to turn around by FY16 with its construction venture.

In an interview with The Edge Financial Daily, the group’s joint chief executive officer Datuk Seri Dr Yeoh Seong Mok said Instacom is shifting away from its reliance on the telco industry to focus more on the construction sector, which offers more sustainable earnings and stronger revenue growth visibility.

“As you can see in our recent [construction] job wins, telco towers are not able to give us that kind of revenue, and with the contracts we won, we are confident that Instacom would turn around in FY16” he said. “Say we get [a] 15% gross margin from the contracts, that works out to be about RM11 million annually across three years, which is substantial to Instacom’s financial numbers today,” Yeoh explained.

Last Thursday, Instacom announced that it had won RM230.29 million worth of construction works from China Railway Construction Corp Ltd, via the latter’s Malaysian unit, CRCC Malaysia Bhd. The projects are expected to be completed within three years.

“This means that we will have strong earnings visibility until the end of 2017. But there will most definitely be more contracts secured over 2016, 2017 and beyond,” Yeoh said.

Under the letter of awards (LoAs) from CRCC, Instacom’s subsidiary Vivocom Enterprise Sdn Bhd is obliged to provide construction works for the second package of the proposed mixed-commercial development 1Gateway in Klang worth RM195.53 million, and the second package of a condominium project known as Pavilion Hilltop in Mont Kiara, Kuala Lumpur worth RM34.76 million.

Vivocom is a wholly-owned subsidiary of Neata Aluminium (M) Sdn Bhd, which in turn is a 78.6%-owned subsidiary of Instacom since Nov 5.

Yeoh said the construction division will continue to operate under the Vivocom brand, as the name is more reputable among international clients like CRCC.

Therefore, Instacom has proposed to change its name to Vivocom Intl Holdings Bhd.

Yeoh said the two LoAs were in addition to Vivocom and Neata’s current order book of RM247.35 million. “With this RM231 million contract awards, we have to date secured projects worth RM478 million. Of this, RM378 million are yet to be completed and billed,” he said.

For the second quarter of FY15 (2QFY15), Instacom posted a net loss of RM1.46 million, against a net profit of RM1.55 million a year ago.Meanwhile revenue plunged 42.49% to RM8.64 million from RM15.03 million in 2QFY14. The group attributed the weaker results to lesser work orders for its telco businesses. For the six months to June 30, 2015, Instacom reported a net loss of RM535,000 compared to a net profit of RM6.21 million a year ago.

For FY15, Yeoh said profits from the construction businesses will only be consolidated in November and December because Vivocom and Neata only became Instacom’s indirect and direct subsidiaries respectively, on Nov 5 this year. “We have only two months of contribution [from Vivocom and Neata] this year, so we will see the full momentum next year (FY16),” he said, adding that construction business will contribute about 75% of the group’s total revenue by then.

Before Nov 5, Instacom owned only a 35% stake in Neata.

Yeoh regarded the acquisition as a strategic one as Neata, which usually has a 35% gross margin in its aluminium manufacturing business, has recently been awarded projects worth RM40 million. “Apart from that, we are also very close to securing additional contracts worth RM90 million, which Neata has tendered for,” he revealed.

Despite the catalysts in the construction and manufacturing divisions, Yeoh said Instacom will not be exiting the telco tower business.

“We are still into telco towers, we are diversifying just to expand our revenue stream, the business has its own prospect, but the margin is getting thinner, so we have to grow in other ways,” he said.

Last week, the group’s subsidiary Instacom Engineering Sdn Bhd secured a RM29 million contract for the installation of telco towers in 30 hub sites in Perak, Negeri Sembilan and Sabah. The contract entails the supply, delivery and installation of tower structures in accordance with the universal service plan approved by the Malaysian Communications and Multimedia Commission.

Collectively, Yeoh said all three divisions — construction, telco and manufacturing — have a total tender book value of RM1.8 billion.

For comparison, OCK Group Bhd, which is also involved in the telco tower business, saw its net profit for 2QFY15 rise 69.8% year-on-year to RM5.13 million from RM3.02 million, while revenue rose 61.81% to RM70.27 million from RM43.43 million.

OCK attributed the improved performances to the substantial contribution from its regional businesses in Indonesia, Cambodia, Myanmar, and China, as well as significantly higher contribution from undertaking sites maintenance works and the distribution of telecommunication equipment in Malaysia. Although Instacom and OCK are operating in the same industry, both have different business models. Instacom builds telco towers and receives construction remuneration while OCK owns the telco towers and leases them to its clients.

Instacom fell one sen or 4.44% to 21.5 sen last Friday — it was the most actively traded counter that day — giving it a market capitalisation of RM526.6 million.Meanwhile, OCK fell one sen or 1.23% to 80 sen, valuing it at RM427.8 million.