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

- SCable reported 1HFY15 net profit of RM23.7mil. This is a marked improvement from RM2.3mil reported a year earlier due to contributions from newly acquired companies as well as billings from jobs on hand.

- While earnings make up 41% of our full-year estimate, we deem it to be in line as we expect stronger contributions from the 500kV job in 2H.

- Sequentially, SCable’s 2Q earnings were stable at RM11.8mil (vs. RM11.9mil in 1QFY15) while topline fell 12% to RM303mil. This means that SCable’s net margin had improved 0.4ppts QoQ to 3.9%, which is partly helped by a lower tax rate of 25% (vs. 28%).

- For 1H, SCable reported an improved net margin of 3.7% (vs. 1.4% a year earlier), which is in line with our expectation of 4% for the year.

- The cable division reported a profit of RM12mil (vs. RM2mil a year earlier) on the back of contributions from newlyacquired Leader Cable and Universal Cable.

- The transmission division also saw a marked YoY improvement in profit (RM25mil vs. RM1mil) mainly on the back of higher progress billings from jobs on hand.

- The weak link this time around was its galvanised steel division, which was affected by an adverse forex impact in the purchase of raw material.

- Moving forward, earnings will continued to be supported by its outstanding order book of RM1.5bil. Notably, we understand that earnings recognition of its 500kV job will flow through strongly in 2H as it nears completion. Other outstanding jobs include the RM493mil Balingian and the RM257mil Pengerang projects.

- SCable has a tender book of ~RM1.5bil. YTD, SCable has secured RM27mil worth of jobs (vs. our assumption of RM260mil; FY14F: RM765mil). But we are unperturbed as management is more focused on securing jobs with better margins, rather than order book growth.

- To this end, the group is tendering for select jobs for the implementation of its new underground 275kV cables that yield higher margins. Other prospective jobs include:- (i) packages for TNB’s 500kV line in Peninsular; (ii) underground cables for 132kV lines in Petra Jaya, Kuching; and (iii) TNB’s tenders for cable supply for distributions lines worth ~RM1.2bil.

- Maintain BUY. Valuations are undemanding at 7x currently.

Source: AmeSecurities Research - 26 Aug 2015