- We maintain BUY on Sarawak Cable (SCable) with an unchanged fair value of RM1.70/share, pegged to an FY15F PE of 9x.

- SCable reported net earnings of RM26mil for FY14F (vs. RM1mil last year) on the back of a 48% rise in revenue.

- However, after stripping off EIs (comprising gain on bargain purchase amounting to RM98mil and -RM25mil impairment of goodwill), SCable would have reported a core net loss of RM48mil.

- This had missed expectations as we had expected a minor operating profit. The major disappointment came from the contract revenue division which saw segment losses widening to RM45mil from RM2.5mil a year earlier.

- Nevertheless, we understand that the losses were due to certain provisions and the division should start on a cleaner slate this year with stronger contributions from the 500kV job.

- SCable had also proposed a first and final single-tier dividend of 2.5 sen/share (vs. 1.5 sen/share in FY13).

- Sales from the cable division doubled to RM156mil but margins had contracted to 4.6% (from 7% a year earlier). The galvanised steel division also saw margin contracting by 1.5ppts to 3.9%.

- SCable’s net gearing increased to 1.4x (from 0.1x at end- FY13) following the completion of its acquisitions of Leader Cable and Universal Cable. We expect net gearing to be reduced to 1.2x by year-end on the back of a stronger cash flow generation for the enlarged entity.

- Also note that SCable had consolidated into its balance sheet but did not recognise any operating profits from the two companies as it had only completed the acquisitions late last year. As such, we expect profitability to improve this year.

- As an enlarged entity, the group is well positioned to bid for upcoming TNB jobs (with a reported capex of ~RM1bil p.a. to upgrade the transmission and distribution network). Other potential jobs include the Selangau- Mapai transmission line and the 275kV Tondong substation project.

- Also, SCable will also see progress billings from the RM493mil Balingian and RM257mil Pengerang projects this year.

- SCable currently has an outstanding order book of ~RM2bil and a tender book of RM1.bil. Maintain BUY.

Source: AmeSecurities