- We maintain BUY on Sarawak Cable Bhd (S Cable) with a lower sum-of-parts-derived ex-bonus fair value of RM2.33/share (vs. RM2.50 previously) on lowered earnings, as 1HFY13 numbers were below expectations.

- S Cable recorded a net loss of RM436,000 for 2QFY13, compared to net profit of RM1.06mil a year earlier.

- This resulted in a net profit of RM0.9mil for 1HFY13 (1HFY12: RM3mil). The decline was due to slow progress of ongoing contracts, weak demand for galvanised steel products and higher administrative and other expenses.

- Notably, the group saw an amortisation of RM1.9mil for intangible assets. Management indicates that this is related to cost overruns for two projects.

- There was also an increase of administrative and other expenses of 69% and 104% YoY respectively due to higher overhead costs for its subsidiary Trenergy. Nevertheless, management expects these to be one-off items in 2QFY13.

- Overall,1HFY13 turnover fell by 18.5% YoY to RM106mil from RM130mil a year earlier.

- Sales for cables and conductors division declined by 33% but were mitigated by better EBIT margins. However, sales for its galvanised steel and transmission tower division fell by 67% due to weaker demand.

- While contracts revenue rose by 38% YoY to RM603mil (accounting for 57% of total revenue), the division recorded a pre-tax loss of RM0.9mil due the slow progress of current projects and amortisation of intangible assets.

- Due to the lower-than-expected results, we have trimmed our FY13F-FY15F earnings. Nevertheless, we expect the amortisation to be a one-off item and earnings to improve in the second half as more projects are expected to be rolled out.

- Notably, S Cable is seen as the frontrunner for the 500kV backbone line (transmission package worth ~RM1bil), which is expected to be awarded next month.

- S Cable yesterday also announced Sept 10 as the ex-date for the 1-for-5 bonus issue while the entitlement date is Sept 12.

- Management also indicates that demand for poles and cables have increased in recent months due to the acceleration of rural electrification scheme in Sarawak.

- We maintain BUY on S Cable with a SOP-derived fair value of RM2.33/share (ex-bonus). It is trading at alluring core FD PEs of 5x-11x for FY14F-15F

Source: AmeSecurities