- We maintain HOLD on Sarawak Cable Bhd (SCable) with a lower sum-of-parts based fair value of RM1.60/share (vs. RM1.70/share previously).

-  SCable reported a net profit of RM2.3mil for 1HFY14 vs. RM0.9mil a year ago. This is on the back of a 54% sales growth to RM164mil.

-  Sequentially, 2QFY14 top line grew by 7% to RM84.5mil. However, earnings fell by 31% to RM0.9mil.

-  SCable’s 1H earnings only made 17% of our previous earnings forecast of RM27mil due to the slower-thanexpected recognition of the 500kV job.

-  We understand that the 500kV job was still in the preliminary stages and only began contributing in 2Q.

About 8% of the RM620mil job has been recognised thus far.

-  Nevertheless, its contracts division remains as the biggest contributor (at 70% of total sales) to the group. Its revenue almost doubled to RM115mil from a year earlier.

-  Sales for its power cables and conduction segment rose 4% YoY but suffered from a 1.9ppts margin

compression to 5.6% during the 6M period. Meanwhile, its galvanised steel products and transmission tower segment saw a substantial margin improvement following a full depreciation of assets at fair value in 2Q.

-  We have trimmed our FY14F-16F earnings by 5%-42%. This is to reflect the current progress of the 500kV job as well lower new jobs assumption of ~RM200mil p.a.

-  Nevertheless, we expect contributions from the 500kV job to come in stronger from 3Q onwards with an EBITDA margin of ~8%. The bulk of the contributions will be seen in FY15F and FY16F.

-  With the 500kV job at hand, management hopes to secure more jobs for the supply of power cables and galvanised steel products.

-  Recall that the due diligence for the proposed acquisition of 100% stakes in Universal Cable (M) Bhd

and Leader Cable Industry Bhd for RM210mil has been extended until 12 Sept. The acquisition – if it follows through – is expected to be funded via new share issuance, borrowings, and offset of debts.

-  As details are yet to be firmed up, we have not factored in the proposed acquisitions into our model. We maintain HOLD on SCable.

Source: AmeSecurities