- We maintain BUY on Sarawak Cable Bhd (SCable) with an unchanged SOP-based fair value of RM2.20/share. Our SOP is based on 10x PE FY16F EPS for its existing businesses, and the DCF value of its hydro plant in Sumatra.

- SCable reported a net profit of RM4.7mil in 3Q (vs. RM0.4mil a year earlier) – bringing the 9M earnings to RM28mil.

- While earnings made up 68% of our full-year forecast (and 58% of consensus), we maintain our numbers as we expect a better 4Q.

- Cumulatively, SCable’s earnings grew exponentially (from RM3mil) on the back of a 320% topline expansion. The marked improvement can be attributed to the acquisition of Leader Cable and Universal Cable that was completed in 4Q14.

- Sequentially, earnings dipped to RM4.7mil (vs. ~RM12mil each in 1Q and 2Q) due mainly to the adverse forex impact in the purchase of raw materials for its steel structures division. To this end, the steel division reported a loss of RM136,000 for the 9M period. Nevertheless, this was mitigated by the stronger performances of its cables and projects divisions.

- In any case, management expects the division to normalise in 4Q as it had renegotiated terms with its supplier to mitigate forex fluctuations.

- All in, our numbers are maintained as we have already reflected the weaker 3Q. 4Q results is expected to come in stronger with contributions from the Pengerang and 500kV jobs, as well as the higher margin HV cables. Note that RM280mil (of RM620mil) of the 500kV backbone job has only been recognised as at end-Sept. The 500kV job is expected to be completed by 1H16.

- Outstanding order book remains healthy at RM1.5bil. Moreover, SCable’s mini hydro plant in Sumatra will provide steady earnings (PBT contribution of ~RM20mil p.a.) when it comes online in March 2016. There is further upside for this business as SCable is in advance talks to develop another two 10MW plants in Sumatra at the same tariff rate.

- YTD, SCable has secured RM46mil worth of jobs (our replenishment target: RM250mil). Job prospects include:- (i) 275kV underground cables in Pengerang (among three bidders); (ii) TNB’s 500kV line package 3; and (iii) cable supply to TNB (~RM900mil p.a.). Winners for the first two could be made known by year-end.

- We have a replenishment rate of RM400mil for next year. All in, we like SCable for its leading position as an integrated transmission line and power cable player in Malaysia – supported by steady recurring income from its power plant. Maintain BUY; our fair value implies a target PE of 10x.

Source: AmeSecurities Research - 30 Nov 2015