We are turning cautious on Instacom given that two of its major shareholders had pared down their interests in the company. With limited visibility on contract flows and to err on the side of caution, we cut our FY13/FY14 forecasts by 14%/29% respectively. We downgrade the stock to NEUTRAL (from BUY), with a lower MYR0.29 FV (from MYR0.51), based on a 10x FY14 P/E.
* Share/warrant selldown. In the last two months, the public faces of Instacom – Anne Kung, CEO and Thomas Ngu, director of sales and project management – had reduced their stake in the company. We gather that Anne Kung’s 14.5% equity interest in Instacom is unchanged, while Thomas Ngu pared his stake to 7.8% (from 14.5%). However, both had disposed of all of their warrants (collectively, 29% or 102m units).
The other two major shareholders, Chan Chuck Yan and Wong Say Khim, did not participate in the selldown.
* Selldown by insiders. We are alarmed by the recent development as Anne Kung and Thomas Ngu are important individuals at Instacom from the operating perspective. When contacted, they were not able to provide satisfactory explanations. Hence, we are adopting a cautious stance on the company and its prospects going forward.
* Forecasts. Given limited visibility on the group’s contract flows and erring on the side of caution, we remove the fibre contribution of MYR25m-26m and MYR205m worth of jobs from 1M Utama SB from our financial model. We cut our FY13/FY14 forecasts by 14%/29%, as these job wins in 2H13 as guided by Instacom have yet to materialise.
* Risks. Key risks are: i) growing trend among telcos to share their networks, ii) regulatory and execution risks in setting up its infrastructure assets, and iii) a slower-than-expected takeup of its services.
* Valuation & recommendation. Following the downward revision in our forecasts and ascribing to a lower P/E multiple of 10x (from 13x) on FY14 EPS, we derive a lower MYR0.29 FV (from MYR0.51). We incorporate a higher discount factor of 50% (from 30%) against the target P/Es of local mobile operators and regional/global tower-related companies of about 20x to reflect its limited business visibility. All in, we downgrade the stock to NEUTRAL (from Buy).