- We maintain BUY on Sarawak Cable Bhd (SCable) with an unchanged SOP-based fair value of RM1.70/share.

- Last week, we visited SCable’s plant in Kuching and Leader Cable Industries Bhd’s (LCIB) plant in Klang, and came away upbeat about the group’s prospects.

- Our investment thesis is premised on SCable’s earnings accretive acquisitions of LCIB and Universal Cable (M) Bhd (UCMB) for RM210mil.

- Post-consolidation, SCable will become the largest cable supplier in both East and West Malaysia. The acquisition will expand SCable’s product mix and capacity –especially higher margin MV and HV cables (See Exhibit 1).

- Currently, SCable mainly produces HV bare conductors and LV cables with an annual capacity of ~54,000km (vs.the acquiree companies’ ~146,000km).

- Notably, UCMB has completed testing of the 275kV underground cable and will begin commercial production soon. Currently, all underground 275kV cables are imported. We understand that there are requirements for these cables for the RAPID development in Pengerang.

- Following the acquisition, management intends to consolidate two of UMCB’s plants in Johor. In addition, production facility at its Nilai plant may be moved to Sabah to serve the local market. We view these move positively as it will increase efficiency and improve margins. The two companies currently have seven plants located in Johor, Nilai, Kedah, and Klang.

- Note that LCIB and UCMB are among 13 players qualified to supply cables to Tenaga Nasional Bhd (TNB). TNB is expected to call for tenders from 1QFY15 onwards with jobs worth about RM1.2bil per annum (distribution and transmission lines).

- Apart from that, SCable is also in a good position to bid for upcoming LRT3 and RAPID projects. Just last week, SCable had secured a RM257mil transmission job in Pengerang from Petronas.

- As at end-Oct, SCable and the acquiree companies had outstanding order books of RM1.3bil and RM578mil, respectively. SCable currently has a tender book of ~RM700mil.

- Following the EGM to be held on 13 Dec, the acquisitions are expected to be completed by year-end. Our investment thesis of improved margins moving forward remains intact. Maintain BUY.

Source: AmeSecurities