- We continue to place Sarawak Cable Bhd’s (SCable) fair value (RM1.70/share) UNDER REVIEW pending the official confirmation of details of its proposed acquisitions from HNG Capital Sdn Bhd.

- The Edge Malaysia reported over the weekend that the group intends to issue up to 10% of new shares to fund the acquisitions of Universal Cable (M) Sdn Bhd (UCMB) and Leader Cable Industry Bhd (LCIB).

- Group managing director Aaron Toh told the weekly that it intends to borrow RM110mil to fund the acquisitions, while the remaining RM60mil will be offset by debts owed by HGN Capital to UMCB and LCIB.

- At the last closing price of RM1.59/share, we estimate that a total of 25mil shares (9% of current shares outstanding) worth RM40mil could be issued.

- Toh said that the acquisitions would make it the single largest integrated transmission cable player in Malaysia and one of region’s biggest producers of 500kV cables.

- SCable will also be the only producer of 275kV underground cables in ASEAN.

- Toh said the acquisitions will give SCable better economies of scale and help it penetrate the Indonesian market where demand for cables is still strong.

- UCMB has three factories in Nilai and one in Johor, while LCIB has one in Kedah. We expect SCable’s market share in Malaysia to grow to 50% with the acquisitions.

- Recall that HNG Capital will guarantee a total PBT of RM21mil at the two companies for FY14F ending Dec. Any shortfall will be paid by HNG. We understand that margins for the two companies could be lower than SCable’s current cable business but there are plans to improve it postacquisitions.

- We think that the acquisitions will allow SCable to tap the Peninsular Malaysia market where existing lines would have to be upgraded to prevent transmission loss. Tenaga Nasional Bhd (TNB) is expected to spend RM1bil-RM2bil annually to upgrade the existing lines.

- We expect contributions from the 500kV backbone line (transmission package worth RM620mil) to flow through from 2Q onwards. Its current order book stands at RM756mil.

- We maintain our numbers for now as SCable is still conducting due diligence on the proposed acquisitions. We expect a decision in 3Q. We place SCable UNDER REVIEW pending the firming up of acquisition details.

Source: AmeSecurities