- We maintain our BUY recommendation on Sarawak Cable (S Cable) with a SOP-driven fair value of RM2.50/share.

- We believe the 500kV backbone transmission line (transmission package ~RM1b) could be awarded soon as the recent power blackout in Sarawak further underscores the need to expedite its implementation.

- According to news reports, the power failure last week was caused by a sudden drop of 456MW of power supply in the Bakun hydro plant. The outage in Bakun led to a shutdown of Sarawak Energy’s (SEB) power stations in Sejingkat, Batang Ai, Mukah, Bintulu and Miri. The blackout restoration plan was initiated within 10 minutes of the failure but all loads were only fully restored after 9 hours.

- As the state investigates further on the cause of the blackout, we opined that SEB will need to expedite the implementation of the 500kV line soon to ensure stable power supply to heavy industries within SCORE. Yesterday, Press Metal said it was unable to resume production in its Mukah plant due to damage caused following the blackout.

- Our channel checks indicate that the 500kV tender is only awaiting state’s approval and it could come out in August. Note that S Cable is the frontrunner for the job as it is the only integrate power cable and transmission line player in the state (and region).

- Meanwhile, it was also reported that Tenaga Nasional plans to spend RM2.2bil to improve its transmission services in Peninsular Malaysia in FY13 ending Aug 31.

- S Cable has already secured two jobs to replace cables in Perak and Johor with a combined value of RM100million. Given TNB’s commitment, we think S Cable could secure more jobs to replace the former’s 30-year old copper cables with aluminium ones.

- S Cable will also benefit from the acceleration of state government’s rural electrical scheme (RES) to meet the state’s original target of 95% by year-end (currently ~60%). We expect S Cable to secure 80% of the total RM400m worth of jobs to be tendered this year.

- Also, note that the 1-for-2 rights issue goes ex today. We have an ex-rights fair value of RM3.00/share and an ex-all (includes bonus issue) of RM2.50/share.

- We assume a new order book of RM1b for FY13F (including the 500kV line) to be progressively-recognised in FY13FFY15F.

- S Cable is a laggard among Sarawak-based stock with attractive forward core FD PEs (ex-all) of 4x-7x on FY14F-FY15F EPS with ROEs of 18%-24%. Maintain BUY.

Source: AmeSecurities