CMC Infocomm Limited. Overweight. Future Growth to Bring Upside

Transcription

1 Initiating coverage 3 August 2016 Current Price Overweight S$0.050 Fair Value S$0.136 Up / (downside) 172.0% Stock Statistics Market cap S$7.6m 52-low S$ high S$0.235 Avg daily vol 80,044 No of share 152.0m Free float 14% Key Indicators ROE 18F 5.7% ROA 18F 3.2% P/BV 0.63 Net gearing Net cash Major Shareholders Abdul Rahman Bin Yusof 42.5% TEE International 42.1% Source: Bloomberg Liu Jinshu Historical Chart 0 08/15 10/15 12/15 02/16 04/16 06/16 (+65) jinshu.liu@nracapital.com Future Growth to Bring Upside High return / moderate risk. CMC Infocomm Limited (CMCI) reported a net profit of S$94,000 in 2H FY16 as opposed to a net loss in 1H FY16. We initiate coverage on CMCI with an Overweight rating on fair value of S$0.136 on the expectation that future revenue growth will improve and sustain the company s profitability. Potential opportunities include regional expansion in markets that are upgrading to 4G coverage and additional requirements from network operators acquiring new spectrums. In turn, downside risk is mitigated by CMCI s net cash position and conservative share price, which is less than its NTA value per share of 5.8 cents. Pipeline of projects suggest sustained growth in FY17. CMCI announced S$3.8m of contracts in July Previously, CMCI announced an order book of S$18m in August 2015 and S$21m in September We expect CMCI s order book now to be in the range of S$20m to S$30m given sustained contract wins. These orders will help to drive revenue growth over the next one to two years, in addition to recurring orders. 4G coverage remains relatively low regionally. We have also noticed that 4G coverage across Southeast Asia remains low compared to 2G and 3G coverage. As such, regional expansion is a potential growth opportunity for CMCI. CMCI has announced a new joint venture in the Philippines and will apply for a regular license to take on jobs that require accreditation. Fourth telco to potentially benefit CMCI. The Info-communications Development Authority of Singapore will be auctioning new spectrum rights to existing mobile network operators and provisions have been made to account for potential new entrants. However, any new entrant will have to achieve nationwide outdoor coverage by 30 September 2018, thus presenting potential contract opportunity for CMCI. Moreover, the new spectrums will also provide revenue opportunity from existing network operators. Downside risk mitigated by net cash and unchallenging share price. As of 31 May, CMCI has net cash of about S$3.0m (1.97 cent per share) on its balance sheet, as opposed to a market capitalisation of about S$9.9m. Based on a share price of S$0.050 cents, CMCI trades at just 0.9x NTA and 0.6x NAV. Therefore, CMCI has the funds to support expansion and future growth has yet to be fully factored into its share price. The key risk now lies with the company s ability to overcome competition and execute its strategy to improve profitability. Valuation pegged at 13.6 cents. Based on our assumption of revenue growth of 12.4% CAGR across our forecast horizon, we value CMCI at 13.6 cents per share which is equivalent to about 2.3x price to NTA. On balance, we decided to rate CMCI as a high return/moderate risk counter. Key Financial Data (S$ m, FYE May) F 2018F 2019F Sales Gross Profit Net Profit (0.19) (1.50) EPS (cents) (0.12) (0.98) EPS growth (%) nm nm nm PER (x) nm nm NAV/share (cents) DPS (cents) Div Yield (%) Source: NRA Capital forecasts

2 Company Background CMCI is principally engaged in the provision telecommunication infrastructure services. These services entail primarily a) In-Building Coverage b) Outdoor Construction c) Telecommunication Implementation d) Maintenance Services In-Building Coverage and Outdoor Construction refers to the installation of indoor and outdoor antenna, wiring and poles so that users mobile phones can still receive a mobile signal, e.g. 3G or 4G in a given location. Telecommunication implementation refers to the installation of radio base transceiver station equipment e.g. radio components on the rooftop of buildings or in outdoor environments. Maintenance services include corrective and preventive maintenance services to ensure network reliability and minimal network disruptions. Overall, telecommunication network operators such as Singtel, M1 or Starhub rely on service providers such as CMCI for the installation and maintenance of their network infrastructure to provide mobile coverage. Figure 1: Overview of Services In-Building Coverage Outdoor Construction Telecommunications Implementation Maintenance Services page 2

3 Setting the Stage for Growth Net loss lower after adjusting for one-off costs. CMCI reported its full year results for the financial year ended 31 May 2016 on 27 July While the company reported a net loss of S$1.5m, the loss was partially due to S$1.0m of one-off IPO expenses. Excluding IPO expenses, the company lost S$0.5m in FY16. The company was listed on the SGX Catalist on 13 August 2015 during 1H FY15. Steady revenue growth of 8.9% over last four years. Revenue grew by 11.6% from S$16.3m in FY15 to S$18.2m in FY16. Over the last four years, CMCI s revenue has grown by 8.9% CAGR from S$8.1m in Growth has been driven by the Singapore and Thailand markets where the company made S$12.9m and S$3.5m of revenue in FY16. Positive profitability in 2H16. During 2H16, the company narrowed its net loss from negative S$0.7m in 2H15 to a net profit of S$94,000. During 1H16, it lost S$1.6m. The positive net profit in 2H16 and steady revenue growth is encouraging, suggesting that a more concrete turnaround is possible given sustained revenue growth. Figure 1: Revenue and Gross Margin S$m % 26.2% 25.5% 23.2% 21.8% Revenue Gross Margin 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Figure 2: Revenue, by Geographical Segments S$m Singapore Thailand Philippines page 3

4 Near Term Growth Supported by Order Book Pipeline of about S$20m to S$30m of projects. The company announced on 14 July that it has secured S$3.8m of contracts for cellular network engineering and maintenance projects to be completed over the next two years. In addition, the company is in the midst of executing a S$5.4m project to upgrade the mobile and data network coverage of Changi Airport Terminal 2. Prior to the July announcement, CMCI announced S$4.0m of contracts on 28 September 2015, covering In-Building Coverage and network migration projects across six commercial buildings in Singapore. Hence, we expect CMCI to have a net order book or backlog of about S$20m to S$30m at the moment. These projects are likely to be fulfilled over the next two years, based on previous contracts by CMCI. This pipeline suggests that CMCI will likely be able to grow its revenue over the next one to two years. Lengthy track record backs pipeline outlook. CMCI has completed over 80 projects in Singapore, Thailand, the Philippines and Malaysia since Its clients include Singtel, M1, Starhub, Globe and AIS. Equipment vendors such as Nokia, Ericsson and Huawei have also referred network operators to CMCI for installation and maintenance services. Figure 3: Client Portfolio page 4

5 Millions CMC Infocomm Limited Regional Expansion to Support Growth New joint venture in the Philippines. CMCI also announced that it has entered into an agreement with Argosy Properties, Inc to form a joint venture company CMC-AC Infocomms (Philippines) Inc. (CMCCP) with CMCI owning 40% of the former. Argosy Properties, Inc will in turn own the remaining 60%. The joint venture will essentially provide the same services as CMCI, but in the Philippines market. The joint venture will allow CMCI, via CMCCP, to apply for a regular license from the Philippine Contractors Accreditation Board (PCAB). With the license, CMCCP will be able to participate in tenders open only to PCAB accredited companies in the Philippines, and thus fully tap onto the potential of the Philippines market. The partner Argosy Properties, Inc is affiliated to Argosy Partners which is cofounded by Aloysius B. Colayco. A.B. Colayco has previously collaborated with TEE International (one of the two substantial shareholders of CMCI) in other projects. According to the website of Argosy Partners, A.B. Colayco is affiliated with Jardine Matheson Philippines, Colliers Philippines and Maybank Philippines among other businesses. As such, CMCI s local partner will be able to assist CMCI in dealing with the telecommunication companies in the Philippines. 4G coverage in Philippines remain low. The upside for CMCI is that 4G coverage in the Philippines remain low as compared to 2G to 3G coverage. Hence, this market represents significant potential, especially when mobile penetration and usage in this market is high. As of end March 2016, there are 121.7m mobile subscribers 1 in the Philippines as opposed to a population of close to 100m. Regional expansion a longer term growth opportunity. Regionally, we noticed the trend where higher income countries such as Malaysia, Thailand and the Philippines are maintaining and widening 4G coverage to match their 2G/3G networks. On the other hand, 4G coverage remains minimal in other countries such as Vietnam and Indonesia. In the other end of the spectrum, certain countries such as Cambodia still lag behind in 2G/3G coverage. Hence, there are a number of markets where CMCI can target to expand into. Figure 4: No of Mobile Subscribers, Globe and PLDT Q CY15 2Q CY15 3Q CY15 4Q CY15 1Q CY16 PLDT Globe 1 Based on the subscriber bases of PLDT, Inc. and Globe Telecom only. page 5

6 Figure 5: Regional 2G/3G Coverage Across All Networks (Strong Signal Shown in Green, Weak Sign in Red) Source: NRA Capital Figure 6: Regional 4G Coverage Across All Networks Source: NRA Capital page 6

7 Potential Fourth Telco to Add to Upside Spectrum auction to be finalised by end In April, the Infocommunications Development Authority of Singapore published the information memorandum and auction rules for the 700 MHz, 900 MHz, 2.3 GHz and 2.5 GHz Spectrum Rights (2016) for the provision of 4-G and/or International Mobile Telecommunications-Advanced telecommunication systems and services. The memorandum specifically stated in Page 14 Paragraph 7.1 that the IDA is prepared to grant spectrum rights to an operator that is a New Entrant any operator that is not Singtel, M1 or Starhub. The allocation of the New Entrant Spectrum(s) will take place prior to the General Spectrum Auction for the existing network operators. If the New Entrant allocation is not taken up, the spectrum will be made available for allocation in the general auction. The spectrum auction implies that a new fourth mobile network operator (with its own network) may emerge in Singapore if there are bidders. Any prospective New Entrant will have to submit an expression of interest by 1 September In turn, the IDA will announcement whether the New Entrant Auction will proceed in 3Q 2016 or 4Q By 4Q 2016, the general spectrum auction will start, suggesting that the New Entrant Auction will be completed within Any new operator will have to roll out its network fast. According to the same memorandum, the new operator will have to achieve nationwide outdoor service coverage by 30 September 2018 i.e. 18 months from the commencement of the allocated spectrum rights. Thereafter, the operator will have to achieve road tunnel and in-building service coverage by 30 September By 30 September 2021, service coverage will have to be extended to underground MRT stations and lines. The implication of this timeline means that any prospective network operator will have to rapidly contract service providers such as CMCI to install the relevant network infrastructure once the auction results are out. Due to the tight timeline, the entire process will likely be farmed out to several contractors. Figure 7: Coverage Timelines Applicable to New Network Operator Nationwide outdoor service coverage Road tunnels and in-building service coverage Underground MRT stations and lines Source: IDA 30-Sep Sep Sep-21 CMCI will still have new business without a fourth telco. Suppose a fourth telco does not emerge, the auction of the spectrums to the existing telecommunication companies also translate to business opportunities for CMCI, due to the need to reconfigure and/or install new equipment for the new spectrums. page 7

8 Untapped IPO War Chest to Fund Expansion Net cash of S$3.0m. As of 31 May 2016, CMCI has cash of S$5.21m and deposits of approximately S$62,000, as opposed to loans, borrowings and amounts due to shareholders of S$2.25m. During the IPO in 2015, CMCI raised S$3.98m of net proceeds, of which S$3.02m has been allocated for the expansion of business operations and remain unutilized. Moreover, the company remains in a positive working capital with non-cash net current assets of S$4.9m, backed by S$12.1m of receivables and balances due from customers against current liabilities, excluding debt, of S$7.2m. Hence, CMCI s balance sheet remains unchallenged to support further growth. Figure 7: Summary Balance Sheet Amt due from customers 4.86 Amt due to customers 0.79 Trade and other receivables 7.26 Trade and other payables 6.14 Cash 5.21 Amt due to shareholders 0.14 Total Current Assets Shareholder's loan 1.15 Loan and borrowings 0.62 PPE 0.96 Provision for tax 0.29 Intangible assets 3.19 Total Current Liabilities 9.12 Other non-current assets 0.22 Total Non-Current Assets 4.37 Total Non-Current Liabilities 0.58 Cash and non-current deposits 5.27 Non-cash current assets Borrowings 2.25 Non-debt current liabilities 7.22 Net cash 3.02 Non-cash net working capital 4.90 Cash generating ability remains intact. While CMCI suffered a net operating cash out flow of S$0.58m in FY16, the cash out flow was mainly due to working capital requirements of an additional S$0.97m. In FY16, CMCI s expenses include non-cash items depreciation of about S$0.25m and amortisation of S$0.64m, as well as one-off IPO expense of S$1.0m. Adjusted EBITDA, excluding IPO expenses, over the last five years has remained positive and averaged at about S$1.05m per annum. While CMCI s administrative expenses have increased post- IPO, the company s cash generating ability before working capital needs remain intact. Figure 8: Adjusted EBITDA (Excludes IPO Expenses) S$m FY12 FY13 FY14 FY15 FY16 Adjusted EBITDA page 8

9 Forecasts, Valuation and Key Risks Based on the outlook of CMCI, we assume that the company s revenue will grow by 20% in FY17, followed by 15% and 12.5% in FY18 and FY19 respectively. FY20 and FY21 revenue growth is assumed to be 10% and 5%. If a fourth mobile network operator is appointed, it will have to achieve nationwide coverage by 30 September Hence, our forecasts of higher growth in FY17 to FY19 are not unreasonable. Gross margin is assumed to be 25% through our forecast horizon of FY17 to FY21, given 25.5% gross margin in FY16. Operating expenses are assumed to grow at 3% per annum. Based on these assumptions, we expect CMCI to breakeven and make net profit of S$0.2m in FY17. Net profit is expected to progressively improve from S$0.7m in FY18 to S$1.85m by FY21 as revenue growth outpaces that of costs. CMCI does not have an established track record of profitability. Notwithstanding the potential of CMCI, we are also mindful of the risks to our outlook. CMCI is a relatively early stage company and has yet to achieve break even in FY16. Hence, our outlook and valuation of CMCI may be impaired if it is unable to meet our forecasts. Competition. Other than relying on recurring business from existing mobile network operators in Singapore, one of the key growth drivers of CMCI over the long term will be regional market penetration and expansion. However, CMCI is subject to competition when attempting to enter new markets and incumbents may limit the amount of market share that CMCI can achieve. Trading at close to NTA per share. The mitigating factor in our investment case for CMCI is that its share price has fallen to less than its NTA. Hence, downside risk is limited so long as the company is able to turnaround and remain profitable. On the other hand, sustained losses will erode the company s NTA and further drag on share price. As of 31 May 2016, CMCI has a net asset value of 7.9 cents per share. Excluding intangible assets, CMCI has a net tangible asset value of 5.8 cents per share. In comparison, CMCI s share price closed at 5.0 cents on 2 August or 0.9x NTA. Valuation. Based on our assumptions, we estimate that CMCI will turn free cash flow positive in FY18 and value the company at 13.6 cents per share based on a discount rate of 10% per annum. If we discount CMCI s free cash flows at 15% per annum, we would have arrived at a valuation of 8.2 cents. However, we decided to value CMCI based on a discount rate of 10% bearing in mind the mix of upside and downside risks. Moreover, CMCI s current share price is close to its book value and relatively little growth has been factored into CMCI s share price. Our valuation of 13.6 cents per share is equivalent to about 11.2x FY21 net income of S$1.84m. page 9

10 Figure 9: Key Forecasting Assumptions FY13 FY14 FY15 FY16F FY17F FY18F FY19F FY20F FY21F Revenue growth 20% 2% 3% 12% 20% 15% 13% 10.0% 5% Gross margin 26% 23% 26% 26% 25% 25% 25% 25% 25% Admin exp Other operating exp Finance exp (% of borrowings) -18.7% -7.8% -3.6% -29.8% -8.0% -8.0% -8.0% -8.0% -8.0% Gross debt to equity 7% 7% 4% 19% 20% 20% 20% 20% 20% Source: NRA Capital Figure 10: Valuation FY15 FY16 FY17F FY18F FY19F FY20F FY21F Net profit after tax Depreciation & Amortization Capex Change in non-cash working capital Non-cash working capital Change in borrowings Free cash flow to equity Terminal value terminal growth =2% Discount rate PV of free cash flow to equity Explicit value 2.30 PV of terminal value Net cash as of end FY Value of equity No. of shares (m) 152 Value per share (S$) Current share price 0.05 Upside 172.0% Source: NRA Capital page 10

11 Profit & Loss (S$ m, FYE May) F 2018F 2019F 2020F 2021F Revenue Operating expenses (14.9) (17.9) (20.9) (23.5) (26.1) (28.4) (29.8) EBITDA Depreciation & amortisation (0.9) (0.9) (0.9) (0.9) (0.8) (0.8) (0.7) EBIT 0.56 (0.57) Net interest & invt income Associates' contribution Exceptional items (0.6) (1.0) Pretax profit 0.11 (1.47) Tax (0.30) (0.03) 0.00 (0.18) (0.31) (0.42) (0.46) Minority interests Net profit (0.19) (1.50) Shares at year-end (m) Balance Sheet (S$ m, as at May) F 2018F 2019F 2020F 2021F PPE Investment properties Other long-term assets Total non-current assets Cash and equivalents Stocks Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders' funds Minority interests NAV/share (S$) Total Assets Total Liabilities + S holders' funds Cash Flow (S$ m, FYE May) F 2018F 2019F 2020F 2021F Pretax profit 0.11 (1.47) Depreciation & non-cash adjustments Working capital changes 0.20 (1.07) (1.28) (1.09) (1.04) (0.94) (0.52) Cash tax paid (0.15) (0.19) 0.00 (0.18) (0.31) (0.42) (0.46) Cash flow from operations 1.85 (0.58) (0.16) Capex (0.22) (0.71) (0.50) (0.50) (0.50) (0.50) (0.50) Net investments & sale of FA (0.10) Others Cash flow from investing (0.00) (0.68) (0.60) (0.50) (0.50) (0.50) (0.50) Debt raised/(repaid) (0.05) (0.85) Equity raised/(repaid) Dividends paid Others (0.70) (0.08) Cash flow from financing (0.74) Change in cash (0.57) Change in net cash/(debt) (0.76) (0.00) Ending net cash/(debt) KEY RATIOS (FYE May) F 2018F 2019F 2020F 2021F Revenue growth (%) EBITDA growth (%) Pretax margins (%) Net profit margins (%) Effective tax rates (%) NM NM NM Net dividend payout (%) ROE (%) (1.8) (13.4) Free cash flow yield (%) 21.5 (17.0) (10.0) (0.0) Source: NRA Capital forecasts page 11

12 NRA Capital Pte. Ltd ( NRA Capital ) has received compensation for this valuation report. This publication is confidential and general in nature. It was prepared from data which NRA Capital believes to be reliable, and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. No representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in this publication. Accordingly, neither we nor any of our affiliates nor persons related to us accept any liability whatsoever for any direct, indirect, special or consequential damages or economic loss that may arise from the use of information or opinions in this publication. Opinions expressed are subject to change without notice. NRA Capital and its related companies, their associates, directors, connected parties and/or employees may own or have positions in any securities mentioned herein or any securities related thereto and may from time to time add or dispose of or may be materially interested in any such securities. NRA Capital and its related companies may from time to time perform advisory, investment or other services for, or solicit such advisory, investment or other services from any entity mentioned in this report. The research professionals who were involved in the preparing of this material may participate in the solicitation of such business. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additional information is, subject to the duties of confidentiality, available on request. You acknowledge that the price of securities traded on the Singapore Exchange Securities Trading Limited ("SGX-ST") are subject to investment risks, can and does fluctuate, and any individual security may experience upwards or downwards movements, and may even become valueless. There is an inherent risk that losses may be incurred rather than profit made as a result of buying and selling securities traded on the SGX-ST. You are aware of the risk of exchange rate fluctuations which can cause a loss of the principal invested. You also acknowledge that these are risks that you are prepared to accept. You understand that you should make the decision to invest only after due and careful consideration. You agree that you will not make any orders in reliance on any representation/advice, view, opinion or other statement made by NRA Capital, and you will not hold NRA Capital either directly or indirectly liable for any loss suffered by you in the event you do so rely on them. You understand that you should seek independent professional advice if you are uncertain of or have not understood any aspect of this risk disclosure statement or the nature and risks involved in trading of securities on the SGX-ST. page 12