Instacom seeks turnaround with S. Africa venture

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INSTACOM GROUP BHD, a Sarawak-based company with interests in telecommunications infrastructure, construction and aluminium fabrication, is seeking to revive its fortunes with its first major overseas venture after enduring a significant earnings contraction last year.

Instacom is partnering 7 Sirs Group, a South African construction firm, to provide telecommunications infrastructure services there.  The Sarawak firm holds a 51% stake in the newly incorporated subsidiary Instacom Group SA.

According to sources, this new endeavour will entail a fundraising exercise, given its capital expenditure-intensive nature. When contacted by The Edge, a company spokesperson refused to comment on the matter, but said a decision will be made in due course.

Instacom’s (fundamental: 0.8, valuation: 1.20) South African venture and diversification into aluminium fabrication are said to be the brainchild of CEO Anne Kung Soo Ching, who, some say, has a different vision for the company from that of its founders. On Feb 4, the company announced the resignation of co-founder Thomas Ngu as executive director.

“After having been in the industry for two decades, Thomas Ngu has decided that he will pursue other goals and passions outside the company,” says the company spokesperson.

The new venture promises to be highly beneficial to Instacom, given South Africa’s low mobile broadband penetration rate. 7 Sirs is believed to be well connected, having bagged numerous municipal tenders for housing projects in the country, as well as a major low-cost housing development in Namibia.

South Africa is one of the fastest growing mobile communication markets in the world. Like most developing nations, the country’s telecommunications giants are undertaking a massive roll-out of base stations that are 4G-enabled.  

However, there are risks. For example, the country has yet to finalise its new spectrum policy, which would pave the way for the next round of spectrum licensing that is essential for the provision of high-speed 4G Internet.

Apart from the political and regulatory risks, the funding for network infrastructure projects can be very high and time-consuming, making the prospects of an immediate return on investment unlikely. Sources say under the new joint venture, 7 Sirs will undertake the construction works, while Instacom’s role is more towards engineering and technical expertise.

Instacom is aware of these concerns after a prior key contract in Sarawak failed to take off. In May 2013, it had won a RM205 million contract for the provision of telecommunications infrastructure works with a state-linked contractor, but the project seems to have stalled.

This looks to be a pivotal year for Instacom after a disappointing 2014, when a slow roll-out of telecommunications infrastructure works resulted in a major erosion of its earnings.  Net profit for the first nine months ended Sept 30, 2014 (9MFY2014), fell 81% to RM4.19 million compared with the same period last year.

More worryingly, its net operating cash for 9MFY2014 stood at a measly RM571,000, which suggests a significant contraction in cash flow from existing projects, versus RM6.82 million a year ago. The group reported a loss of RM2.02 million for the third quarter ended Sept 30, 2014, its first since listing on Bursa Malaysia in October 2012.

The impending fundraising exercise should rectify cash flow problems and address the group’s working capital needs. It would also mark the first time the group is seeking capital directly from the public, which was previously the main justification for Instacom’s public-listed status.

On the other hand, its earnings prospects for the next two years are assured. This is because the recent acquisition of a 35% stake in Neata Aluminium (M) Sdn Bhd and its wholly-owned subsidiary Vivocom Enterprise Sdn Bhd in an all-shares deal comes with a profit guarantee of RM34 million, which will be recognised beginning this year (FY2015).

Neata is involved in the design and fabrication of aluminium structures, and Vivocom’s services comprise reinforced steel and concrete structural, architectural, civil and infrastructure works.

“Thanks to a strong track record in civil engineering and construction, Neata-Vivocom’s order book is close to RM500 million and growing. The group targets to secure another RM500 million worth of projects by the end of 2015,” says the spokesperson.

The Neata-Vivocom acquisition could grow Instacom’s stature as a telecommunications infrastructure player to be reckoned with, provided that the projects can be rolled out again. The profit guarantee should also provide the group with a little leeway to undertake its South African venture while it waits for local tenders.

For a company whose market capitalisation stood at RM146.7 million — based on its closing share price of 14.5 sen last Thursday — the large order book and the potential of new ventures could boost its prospects this year. However, it critically needs to grow its working capital, as well as address its cash flow issues to undertake new projects.

On the domestic front, Instacom has submitted a bid for Malaysian Communications and Multimedia Commission’s project to construct network towers worth about RM300 million. The result of the tender is expected to be out by May.

 

This article first appeared in The Edge Malaysia Weekly, on March 2 - 8, 2015.