- Election theme play: Speculation on a snap state election has been ratcheted up a few notches in recent days. While polls do not have to be called by June next year, the conjecture is for it to be held by 4Q 2015. Some Sarawak stocks may come under another round of election-theme trading in the lead up to the polls. These may include construction-related companies such as Sarawak Cable Bhd (SCable), Hock Seng Lee (HSL), KKB Engineering (KKB), Cahya Mata Sarawak (CMS – non-rated) and Naim Holdings Bhd (non-rated). Others include timber stocks Jaya Tiasa Holdings (JTiasa) and Ta Ann Holdings (Ta Ann), as well as Bintulu Ports Holdings (BiPort). Here, we highlight the fundamentals and prospects of the Sarawak companies under our coverage. SCable, HSL and KKB are our top picks.

- Allure of cheap power: While the Sarawak Corridor of Renewable Energy (SCORE) has slowed over the past 1-2 years, Sarawak remains economically resilient, with state cash reserves standing at over RM20bil. The federal government has also committed RM27bil to build the 1,663km-long Pan Borneo Highway (936km in Sarawak and 727km in Sabah), and much more to develop the state, particularly in rural infrastructure. In order to entice FDI and to elevate growth, the state government is banking on the supply of relatively cheap hydroelectric power. Apart from both the completed Bakun (2,400MW installed capacity) and Murum (944MW) dams, two more dams – RM4bil Baram (1,200MW) and RM9bil Baleh (1,295MW) – will soon be constructed simultaneously. The dams are part of the state’s plan to ramp up generating capacity to 7,400MW by 2025. Sarawak Energy has projected that residential, retail and commercial customers will require 2,000MW while SCORE customers will require 6,000MW by 2030.

- SCORE beneficiaries: A stand-out among the beneficiaries of SCORE is SCable (BUY, FV: RM1.70/share). Its position as the leading domestic integrated transmission line player puts it in good stead to secure jobs stemming from the construction of the dams. Some near-term prospects for SCable include:- (i) TNB’s tenders for cable supply for distribution lines amounting to ~RM1.2bil; (ii) underground cables for 132kV lines in Petra Jaya; and (iii) TNB’s 500kV overhead transmission lines. Meanwhile, CMS will benefit from the dam projects, given its monopoly in cement supply in Sarawak.

- HSL (BUY, FV: RM2.30/share) will be a strong contender for works packages of the Pan Borneo Highway given its expertise in land reclamation jobs, which will be required for certain stretches of the highway. HSL is also tipped to secure the second phase of the Kuching central sewerage system, which will be worth at least ~RM500mil. It had in 1Q15 completed the first phase, which was worth RM452mil.

- KKB (BUY, FV: RM2.05/share) will benefit from government expenditure in rural development, particularly in the supply of steel pipes for water projects. KKB’s earnings profile is anticipated to change significantly, given its foray into O&G support services via 42%-owned associate and Petronas-licensed services provider Oceanmight Sdn Bhd. We understand it has recently won a ~RM10mil contract to supply a helicopter deck for an oil and gas platform. Additionally, KKB can count on the support of its 20% major shareholder CMS. CM Adenan Satem has said a number of times that Petronas would offer RM2.1bil worth of O&G jobs to local companies.

- We are underweight on the timber sector and have HOLD on JTiasa (FV: RM1.57/share) and Ta Ann (FV: RM3.98/share), given the uncertainties surrounding the industry. An MACC state-wide crackdown on illegal logging has led to the freezing of corporate and individual bank accounts involving over RM600mil. Though we believe JTiasa and Ta Ann would not be affected, there are uncertainties over the state’s stance on existing concessionaires and the possibility of production quotas being cut. A bright spot would be the sustaining of global log prices in view of the shrinking supply. If at all, between the two, we believe Ta Ann’s fundamentals (including a more stable palm oil division) would better support any upward movement in share price.

- We have a HOLD for BiPort (FV: RM7.36/share), for a dividend yield of ~4%. Its recent 1QFY15 net profit of RM36mil was within our expectations, accounting for ~22% of our forecast. We believe BiPort’s medium-term prospects have been priced in, while its longer term fortunes would also depend on how development within SCORE pans out. We have already factored in the possible tariff restructuring involving the port.

- While doubt may then arise over the sustainability of any share price increases in the lead up to the state polls – in view the overall poor market sentiment – we believe SCable, HSL, and KKB are adequately supported by fundamental and growth prospects, and are currently trading at undemanding valuations. Reiterate BUY for the three stocks.

Source: AmeSecurities Research - 18 Jun 2015