- We upgrade Sarawak Cable Bhd (SCable) to BUY (from HOLD) with a higher SOP-based fair value of RM1.70/share (vs. RM1.60/share previously) – which implies a PE of 9x FY15F EPS.

- We have computed SCable’s proposed acquisitions of 100% stakes in Universal Cable (M) Bhd (UCMB) and Leader Cable Industry Bhd (LCIB), as well as contributions from the Balingian job into our model. These resulted in earnings accretion of 51% each for FY15F and FY16F.

- Last Tuesday, SCable announced that it had entered into a share purchase agreement for the acquisitions of the two companies from HNG Capital Sdn Bhd for RM210mil. It will be satisfied via cash of RM110.3mil (including RM2.1mil in deposit paid earlier), assumption of liabilities amounting to RM49.6mil, as well as issuance of 37.6mil new shares worth RM50.1mil (at RM1.33/share).

- We view the acquisitions positively as it will fortify the group as a leading integrated power cable supplier in Malaysia with an estimated 50% market share. Recall that HNG Capital will guarantee a total PBT of RM21mil at the companies for FY14F ending Dec. As such, we deem the acquisitions to be fair at 13x PE (assuming a tax rate of 25%). Also, SCable is acquiring the two companies at a 33.5% discount to the aggregated net assets of RM316mil as at end-Dec 2013.

- The two companies are major suppliers of power cables in Peninsular Malaysia. For FY13F, the acquirees had a combined revenue of ~RM800mil and PATAMI of RM8mil (see Exhibit 1). Previous projects included turnkey jobs for 132kV underground power cables in Kulim Hi-Tech Industrial Park and Cyberjaya, LRT cable signaling system, as well as various jobs for Tenaga Nasional Bhd.

- While the companies’ PBT margins are low at 0.5%-2% (vs. Scable’s cable division’s ~5%), management plans to improve it via cost improvement strategies. We also understand that the two companies have an outstanding order book of RM698mil (with ~RM200mil for the existing LRT job) that would last ~2 years.

- Looking ahead, Scable is in good position to secure more jobs due to TNB’s cable replacement plans, as well as the cable supply for the upcoming RM9bil Bandar Utama-Klang LRT 3 project and RAPID. Notably, UCMB is the sole manufacturer of 275kV cables in Malaysia, which will cater to growing domestic demand.

- We have imputed conservative assumptions based on the PBT guarantee of RM21mil as well as a 1ppt margin improvement for FY15F-FY16F for the two companies. An EGM is expected to be held next month with the acquisitions to be completed in Dec.

Source: AmeSecurities