This article first appeared in Capital, The Edge Malaysia Weekly, on November 30 - December 6, 2015. 

The share price of Instacom Group Bhd tripled over two months on high trading volume, prompting an unusual market activity query from Bursa Malaysia on Nov 19. The activity saw the prices of the company’s warrants — Instacom-WB, Instacom-WC and Instacom-WD — more than triple from late September.

If CIMB Research is right about there being a massive re-rating potential for Instacom (fundamental: 1.25; valuation: 0), both the company’s shares and warrants are poised for further gains.

In a Nov 18 note, CIMB initiated coverage of Instacom with an add recommendation and a 72 sen target price. The stock was trading at 23 sen at the time and closed at 32 sen last Wednesday, up almost four times from its closing price of 8.3 sen on Sept 18.

At its 13-sen close last Wednesday, Instacom-WB, which has an exercise price of 31 sen and expires in September 2018, was trading at a 37.5% premium to the underlying share.

Closing at 21 sen, Instacom-WD — whose exercise price is 12 sen and which expires in July 2020 — fetched a smaller premium of 3.13% to the underlying share.

Instacom-WC, which has a strike price of 10 sen and expires in January 2020, was trading at a 1.56% discount to the underlying share at its 21.5-sen close last Wednesday.

All three warrants have a one-for-one conversion ratio.

According to CIMB, Instacom (soon to be renamed Vivocom) will be transformed into a construction giant through the asset injection of Neata Group. Instacom is currently the largest shareholder of Neata, which owns Vivocom Enterprise Sdn Bhd, the in-house subcontractor of China Railway Construction Co (CRCC) in Malaysia.

Instacom acquired a 35% stake in Neata in October last year and increased its holding in the aluminium structure fabrication company to 78.6% in August this year.

In the research note, CIMB points out that Neata has an outstanding construction order book of RM1.94 billion, 90% of which comes from Vivocom. Instacom itself has an outstanding order book worth RM85.9 million.

As these contracts will commence at different times in 2016, the major flow-through to earnings will occur in FY2017 when the income statement will see the impact of a full-year’s construction billings, the research house says.

CRCC has RM15.8 billion worth of contracts in Malaysia and is negotiating another RM24 billion worth of jobs in Southeast Asia. CIMB believes RM3 billion worth of construction jobs could be won by Vivocom next year from CRCC.

Further wins, should they happen, could fan interest in the securities.

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