• MYR0.50 FV based on 15x FY24F P/E. With an unyielding need for power and cables, Southern Cable has emerged as a thriving player in this evergreen market, poised for continuous expansion. Malaysia's ambitious goal of achieving net zero emissions by 2050 – including higher uptake of renewable energy (RE) sources and the enhancing of the country’s grid, is expected to be a catalyst for the group’s earnings growth.

• National Energy Transition Roadmap (NETR). The Economy Ministry announced the details of NETR Phase 2 last August. From this roadmap, solar photovoltaic (PV) capacity is expected to chart a 14% CAGR to 57GW by 2050 – a boon to the exponential growth in demand for SCG’s certified solar PV cables, which are now widely used by major solar EPCC players.

• Grid. Tenaga Nasional (TNB MK, BUY, TP: MYR12) is upgrading Malaysia's power grid to accommodate the increasing integration of RE and growing energy consumption. Efforts include deploying cutting-edge technology like energy storage systems, smart grids, and transmission line enhancements. NETR estimated that a MYR420bn investment (c.MYR15.6bn pa) will be needed for grid upgrades over 2023-2050, in line with TNB’s guided MYR90bn capex for 2025-2030. Its contracts account for >30% of SCG's revenue, so the group stands to gain significantly from these upgrades. This is also due to its strong and longstanding partnership with TNB and its reputation for delivering high-quality products.

• Moderating input prices. When commodity prices surged in previous years, SCG’s margins contracted due to its inability to pass on costs of materials like polymer (c.20% of total costs) to long-term clients. However, the lower input prices and higher ASP factored into the new contracts should aid the group’s margins recovery and fuel earnings growth.

• SCG’s orderbook is worth >MYR1bn (1.14x cover ratio), providing earnings visibility for the next three years. Its recently secured MYR332.1m contract from TNB for the supply of underground cables and conductors brings its YTD contract wins to >MYR500m. On the back of a solid orderbook and Malaysia’s shift towards using RE, the power grid upgrades, and SCG’s growing export sales and recovering margins, we expect it to record a FY22-25F earnings CAGR of 24.3%.

• Our FV is derived from 15x FY24F P/E. This is a huge discount to its international peer average for the cables and wires business, given SCG’s smaller market cap, local-centric business, and lower margins. However, we note that it is one of the sector’s cost leaders and possesses the widest range of product offerings locally. It also enjoys the lion’s share of demand for cables from TNB. Key downside risks include its dependence on capex spending by the power industry, escalation of input costs, fluctuation in commodity prices, and margin pressure due to competition.

Source: RHB Securities Research - 25 Oct 2023