Analysts believe that Instacom has massive price earnings re-rating potential, given its large valuation gap with its construction peers.
KUCHING: Analysts believe that Instacom Group Bhd (Instacom) has massive price earnings rerating potential, given its large valuation gap with its construction peers.
CIMB Investment Bank Bhd’s research arm (CIMB Research) in a recent strategy report, highlighted that the stock still trades at 4.6- folds for the financial year 2018 (FY17) price earnings, which is at a massive 66 per cent discount to the sector average FY17 price earnings of 13.5-folds.
“We think that this is unjustified, given its estimated FY15 to FY17 earnings per share (EPS) compounded annual growth rate (CAGR) of 437 per cent,” it opined.
CIMB Research also believes that Instacom is a proxy play for Chinese foreign direct investment (FDI) in Malaysia.
“Since China Railway Construction Company (CRCC)’s entry into Malaysia three years ago, it has amassed a whopping orderbook of RM16 billion.
“Group chief executive officer Dr Yeoh, a 30-year construction veteran, is the key enabler behind Vivocom’s strong relationship with CRCC, having been CRCC’s PDP and PMC for almost RM40 billion worth of projects, in his consulting capacity.
“To date, Vivocom has secured about RM500 million worth of projects from CRCC and we expect contract wins to accelerate in 2016,” CIMB Research highlighted.
It also pointed out that Instacom had recently announced a 10 per cent private placement of new shares.
“The 234 million new shares to be issued at an assumed average placement price of 30 sen would raise RM70 million in fresh funds.
“Instacom needs to raise working capital funding quickly to enable it to take advantage of new orders from CRCC.
“Although Instacom’s gearing is very low, fresh equity capital is necessary as bank borrowings would take too long to process (three to six months), given that CRCC’s new projects for Instacom are ready to be awarded,” it added.
The research team further opined, “We forecast a whopping FY15 to FY17 EPS CAGR of 437 per cent, underpinned by the RM2 billion in outstanding construction billings, as well as additional contract wins in 2016, which we estimate at RM3 billion.
“We believe that Instacom is constrained by working capital funding, notlabour or machinery, as it has over 2,000 workers on its payroll and CRCC typically provides machinery/raw material sourcing support.”
Meanwhile, the research team believed Instacom could be a proxy to Chinese FDI flows into Malaysia.
“The recent sale of Edra Global Energy to China General Nuclear Power Corporation (CGN), the Chinese government’s interest to bid for the 486-acre Bandar Malaysia development and the High-Speed Rail project has ignited interest in proxy plays for increasing Chinese investments in Malaysia.
“We see Instacom as a prime beneficiary of this emerging investment theme,” it said.
Hence, the research team pegged an ‘add’ rating on the stock.