I-POWER TO MORPH INTO INSTACOM, POSSIBLY THE BEST RTO THIS YEAR
Haven't been writing much about stocks over the last month because there was nothing much to write home about. At the back of my mind, I had been following the fortunes of I-Power, which is going through a RTO with the injection of Instacom. Instacom is a company I came across last year while looking for candidates to go for an IPO listing.
For an RTO to work well, the new asset coming in has to be "good and sustainable". I regarded Instacom a year ago as a "jewel of sorts", but they chose the RTO route instead of a normal IPO (which would have taken a lot longer, and more hurdles to hump over). Next, the valuation of the existing counter, and the cleaning up of that counter has to be done well. To be followed by a fair valuation of the asset being injected. A RTO could go bad if any of the above factors go haywire.
The final proposal (approved) looks to fit all 3 criteria. Firstly, I-Power shareholders will see their shares being given a 3:2 bonus, to be immediately followed by a 10 into 1 reduction. Which is to say, the current price of 8 sen, if you bought 100,000 shares = RM8,000.
The calculation would be :
100,000 I-Power shares @ 8 sen = RM8,000
Bonus 3:2 = 150,000 bonus shares
Total shares after bonus: 250,000
10 into 1 capital reduction: 25,000 (Instacom shares)
Actual cost of Instacom shares: RM8,000 / 25,000 = 32 sen
The pre and post prices for the exercise would be:
I-Power Instacom
7.0 sen 28 sen
7.5 sen 30 sen
8.0 sen 32 sen
8.5 sen 34 sen
9.0 sen 36 sen
9.5 sen 38 sen
10 sen 40 sen
The Injection of Instacom
Instakom Engineering Sdn Bhd (principally involved in the telecommunication sector), a company which is principally involved in the following:-
• Turnkey Finance and Build;
• Radio Frequency Design;
• Drive-test, Post Processing, Analysis and Optimisation of Coverage;
• End to End infrastructure Build (Site Acquisition, Technical Site Survey ("TSS"), Local Council/ Authority Liaison/ Tower & Cabin works);
• Equipment Installation, Commissioning & Integration and Upgrading 2G to 3G/ 4G/ Long Term Evolution ("LTE");
• Managed Services Operations & Maintenance;
• Fixed Network Solutions (includes outside plant, open trenching, micro-trenching, Horizontal Directional Drilling ("HDD") and Optical fiber installation); and
• Fabrication of Steel Structures and Materials.
The purchase consideration is RM102,000,000 to be satisfied entirely by the issuance of 510,000,000 new Consolidated Shares at an issue price of RM0.20 per Consolidated Share. The deal also comes with :
1. Profit guarantee RM15m for 2012 and RM15m for 2013 (total RM30m) and that guarantee is pledged with new shares issued to “vendor shareholders” as collateral.
2. For YE2011, the company made an after tax profit of RM9.9m, and management is confident based on orders on hand and pipelines of tenders submitted that the 2012 PG of RM15m will be comfortably met
The financials of the company (as extracted from the announcement):-
FYE 2008 FYE 2009 FYE 2010 1H 30JUNE
Revenue (RM'000) 54,045 40290 47402 39,041
Profit Before Tax (RM'000) 3,011 1,033 4,311 5,594
Profit After Tax (RM'000) 2,019 707 3,474 4,195
Shareholders Funds (RM'000) 6,689 7,396 10,887 15,083
Borrowings (RM'000) 130,260 138,945 121,236 115,209
Gearing Ratioo (Times) 19.47 18.79 11.14 7.64
3. In fact for the first quarter of 2012, the company’s reported a PAT of RM4.16m on revenues of RM20m, annualising at PAT of RM16.64m. Based on such financials, Instakom can easily upgrade to the Main Board from ACE within 24 months, which would augurs well for the counter in terms of interest from fund managers, financial institutions and retail traders, as well as coverage from analysts.
4. With the orders on hand and pipeline of tenders submitted, the company has set a PAT target of RM20m for the full year ended 2012. Assuming the PAT target of RM20m is achieved, with the current shares base of 702m shares, the EPS (earnings per share) would come in at 2.8 sen.
Sustained Interest Pre-Exercise
If you look at the price chart of I-Power, you can surmise that there has been very steady accumulation of I-Power shares PRIOR to the exercise going ex-all, which is not very common at all. If you infer from likely net EPS figure of 2.8 sen, that implies the following PER for Instakom:
Instacom Current PER
30 sen 10.7x
35 sen 12.5x
40 sen 14.2x
45 sen 16x
50 sen 17.8x
Key Positives
a) Instacom has a prudent cash management trait, and to me that is a very important aspect in gauging management's strategic ability in deployment and effective margins focus. For YE2011, the company recorded net cash inflow from operations of RM11.9million and overall net cash inflow of RM2 million. As at YE2011, the company has RM11.6million in its coffers to sustain current operations and to finance future expansions and growth plans.
b) Instacom is easily the best managed and most dependable telco services backbone operator in the country by a proverbial mile. Just ask the insiders, ask anyone senior at Maxis, Celcom, etc... Needless to say, the rapid changes from 2G to 3G to 4G and so on will only work towards Instacom's favour. Instacom is the biggest player in East Malaysia in its particular subsector of the telco industry, and with the big players such as Maxis, Celcom and Digi focusing on expanding their coverage in the Borneo states, Instacom is primed to capture a big slice of such business opportunities. In particular with MCMC driving the expansion of telephony and broadband coverage in East Malaysia.
c) Its the right time for them to be listed as their growth has been stalled by the cap on capital. This business requires capital guarantees at times when securing projects. By being listed, they would not have to turn away some of the projects coming their way (which I came to know about when talking to the company a year ago), and believe you me, they had to turn away substantial projects with decent margins, which is why I am keen on this RTO. Thus I think the 2.8 sen EPS for current year is trifling, and they should have no problem getting that up to 3.5 sen to 4.0 sen next year, which may explain some of the hectic accumulation of I-Power shares even at current levels.
d) The telco industry is unique in the sense that there exists only a select few major players at the first tier level such as TM, Celcom, Digi and Maxis whilst the 2nd tier players include the likes of YTLe, U-Mobile, P1 and Redtone. At the principal level of equipment manufacturer and supplier, its even more exclusive, confined to mega players like Nokia-Siemens, Ericcson, Hua Wei and ZTL. This is most advantageous to Instacom as they only have to deal with established reputable players who are not only good paymasters, but who employ the best professionals to run solid businesses with a clear future direction and sound growth strategy worldwide.
The Drivers
One usually can tell how far a company will go by the quality and calibre of its leadership and management team. This is one aspect I must say gives me considerable confidence in Instacom, having had the chance to meet with them a few times over 12 months ago – its well balanced, complimentary and highly experienced, able, proven and cohesive top management team.
The three original founders of Ann Kung, Thomas Ngu and Wong complement each other.
Anne Kung Soo Ching, a Malaysian aged 50, is the chief executive officer of Instakom responsible for strategic development, finance and administration and has been involved in the telecommunication industry for more than eight years. She holds a Bachelor of Laws (Honours) Degree from the London School of Economics and Political Science, University of London. She has been called to Lincolns Inn in London and the High Court of Borneo in 1984. Prior to joining Instacom, she was the Finance Director of Quality Concrete Sdn Bhd in 1992 before assuming the position of Executive Director in Quality Concrete Holdings Berhad (the listed entity of Quality Concrete Sdn Bhd) in 1996. She has served as the Chairperson of the manufacturing sub-committee of Sarawak Chamber of Commerce & Industry since 1998. She is a member of the SOCSO Appeal Board Member and Industrial Tribunal since 2004. In addition, she is also a member of the Malaysian Institute of Accountants and the Institute of Chartered Accountants in England & Wales.
Ngu Sing Hieng, a Malaysian aged 48, is the director of sales and project management of Instacom, possesses more than 20 years of experience working in the industry. He has been the Executive Director of Instacom since the incorporation of Instacom. He holds a Bachelor of Engineering Degree in Electrical Engineering from the University of New South Wales, Australia. He was a graduate member of the Institute of Electrical and Electronics Engineers, United States of America and the Association of Professional Engineer, Australia. Prior to joining Instacom, he was the director of Tennas Komunikasi Indah Sdn Bhd. He has also served in various companies such as Skypage Communications, Sydney (as programmer and Unix System Administrator), Answer Services (NZ) Ltd (as System Engineer) and Hager Elektronik Sdn Bhd (as General Manager).
Wong Say Khim, a Malaysian aged 48, is the director of operations of Instacom. He has 21 years of experience in civil, mechanical and electrical contracting works and installation of telecommunication towers and cabins. He has been involved in projects awarded by Sapura Telecommunications Berhad, DiGi Telecommunications Sdn Bhd and Maxis Mobile Sdn Bhd for the erection and installations of telecommunication towers and related civil works.
Conclusion
It should be an exciting counter and judging from the fundamentals and sustained collection, I think Instacom should trade between 36 sen-52 sen on an ex-basis and still be within fair valuation range.