- We maintain HOLD on Sarawak Cable Bhd (SCable) with an unchanged sum-of-parts based fair value of RM1.60/share.

- SCable announced on Friday that it has accepted the conditional offer made by HNG Capital Sdn Bhd for the proposed acquisition of the latter’s 100% stakes in Universal Cable (M) Bhd and Leader Cable Industry Bhd for RM210mil.

- Following the acceptance, SCable has made a payment of RM2.1mil in earnest deposit to HNG Capital.

- The parties have until 13 Oct to finalise the terms and conditions and to enter into a conditional Shares Sale Agreement (SSA).

- Until then, HNG shall not offer to sell any of its equity interest in the two companies to any other parties. The earnest deposit shall be refunded in full and free of interest if, for any reason, the SSA is not signed on or by 13 Oct.

- The acceptance was announced last Friday following three months of due diligence conducted by SCable.

- While details of the deal have yet to be firmed up, The Edge Malaysia reported earlier that SCable may issue up to 10% of new shares to fund the acquisitions. It may also borrow RM110mil with the remaining RM60mil to be offset by debts owed by HNG to the two companies.

- The acquisitions would make SCable the leading cable player in Malaysia. SCable will also be the only producer of 275kV underground cables in ASEAN.

- Recall that HNG Capital will guarantee a total PBT of RM21mil for the two companies for FYE Dec14. 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 post-acquisitions.

- 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.

- 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