Instacom shares surge after CIMB IB Research report

PETALING JAYA: CIMB Investment Bank Research has initiated coverage on Instacom Group Bhd with an "add" rating and target price of 72 sen, noting that the company will morph into a potential giant construction company with the asset injection of Neata group.
Following the report on Wednesday, Instacom emerged as the most actively traded stock yesterday, and its share price soared 20.7% to its day high of 32 sen at one point. It settled at 31.5 sen, up 5 sen or 18.9%, with 372.5 million shares done.
Following the rise in price and volume of its shares, Bursa Malaysia Securities Bhd slapped Instacom with an unusual market activity (UMA) yesterday.
In its reply, Instacom said it was not aware of any corporate development, rumour, report or any other possible explanation for the rise in its share price and its trading volume save for contracts secured by its subsidiaries totalling RM259.28 million for construction works for the second package for the 1Gateway mixed commercial development in Klang and for the second package for the Pavilion Hilltop condominium project in Mont Kiara as well as to supply tower structures on 30 hub sites across Perak.
Instacom Group, to be renamed Vivocom Intl Holdings Bhd, is an ACE Market-listed builder of telecommunication towers and other related civil works for tower sites, primarily in Sabah and Sarawak.
However, with the asset injection and acquisition of Neata Aluminium in 2015, Instacom has been transformed from a telco tower builder into a potential giant construction company, with an outstanding construction order book of RM2.0 billion as at end-September 2015.
"We initiate coverage with an add rating and SOP-based target price of 72 sen. We value the construction business at 9x FY17 price-to-earnings ratio (P/E), a premium to the small-cap peer contractors P/E of 7-8x.
"We believe that Vivocom has massive P/E re-rating potential given the large valuation gap with its construction peers and zero analyst coverage.
"It is trading at FY17 fully-diluted P/E of 3.0x, 80% discount to the sector FY17 P/E of 14.5x which is unjustified given 456% FY15-17 earnings per share (EPS) compounded annual growth rate. On a Price-to-Book Value (P/BV) basis, the stock is also very cheap, trading at 0.9x FY17 P/BV versus FY17 return of equity of 48%," it said.
The research house believes that the premium is justified as Vivocom is the in-house contractor for global Chinese construction giant, China Railway Construction Corp Ltd (CRCC), in Malaysia and Southeast Asia – thus elevating its status as an emerging construction giant.
While Malaysian contractors typically earn pre-tax margins of 8-9%, CIMB IB Research noted that Vivocom earns 12-13% margins given its business model of primarily engaging in negotiated tenders. "Being CRCC's in-house contractor enables this," it said.
By FY17, it forecast Vivocom's revenue profile to completely transform from a telco tower-based company to a construction company, where construction will contribute 95% of group revenue and 97% of gross profit.
"We consider the telco business to be non-core and we believe that it could be divested in the future," it said.
CIMB IB Research said Vivocom is likely to apply for an upgrade to the Main Market of Bursa Malaysia in 2016, which will help improve its investor profile and investibility.
It pointed out that group CEO Dr Yeoh Seong Mok is the key enabler behind Vivocom's strong relationship with CRCC, having been the latter's Project Delivery Partner and project management consultant for almost RM40 billion worth of projects, via his private consulting company, WY Consultancy & Development Services Sdn Bhd.
CIMB IB Research tipped Vivocom to be a direct beneficiary of the Penang Transport Master Plan. "We believe that investors need look no further than Vivocom. CRCC is the engineering procurement and construction contractor and design consultant while WY Consulting is the project management consultant.
"Management is very confident of securing subcontract jobs for this mega project given CRCC's and WY Consulting's direct involvement in the project," it added.