Highlights

• Largest post-acquisition. Following the acquisition of Universal and Leader Cable, SCable has emerged as the largest power cable manufacturer in Malaysia. The acquired companies have revenue 5x larger than SCable’s cable division while overall capacity was boosted by 4-5 folds.

• Superior orderbook cover. SCable’s construction division (which undertakes power related infra) sits on an orderbook of RM1.2bn. This translates to a superior cover ratio of 8.1x (highest in our coverage universe), which necessitates robust growth once the orderbook is executed.

• Proxy to Sarawak’s growth. To harness its cheap energy potential, Sarawak has identified 12 dams to be built. With Sarawak Energy no longer listed, SCable is a good proxy to the state’s power generation capacity growth via the supply of cables and construction of transmission lines. The Pan Borneo Highway is another prospect as SCable intends to supply steel structures such as guardrails and lamp poles.

• Peninsular potential. SCable is bidding to supply 275kV cables and transmission line construction at RAPID. Other opportunities in Peninsular Malaysia include supplying 132kV underground cables for the MRT Line 2 and the construction of substations for Tenaga.

• Recurring earnings stream. SCable holds a 20 year PPA to supply electricity to Indonesia’s national utility company via its 11MW Kombih3 hydro plant in North Sumatera. Tariffs have been revised upwards twice since 2012 and there is potential for a third adjustment in 2016. Commercial operation of Kombih3 is targeted for 1Q16.

Risks

• Net gearing is high at 144% due to the assumption of debts from the acquisition and high working capital requirements.

Forecasts

• While losses were incurred in FY14, we expect FY15 to swiftly turn to its highest earnings recorded (yet) at RM44m. 1H15 earnings clocked in at RM24m, up 10-folds YoY.
• Earnings for FY16-17 should continue to scale new highs at RM55m (+25%) and RM65m (+19%).

Rating

• Initiate with BUY, RM2.57 TP (+51% upside)
• SCable has strong growth potential driven by acquisitions, superior orderbook cover and a new earnings stream from its hydro plant. The impending Sarawak elections could be an added kicker as investors scavenge for such plays.
• Broadly similar to Cahya Mata Sarawak (CMS), SCable offers investors a ticket to the Sarawak growth theme but at a much cheaper rate. SCable’s P/E is multiple is at a 49- 52% discount to that of CMS.

Valuation

• Our SOP based TP of RM2.57 is based on (i) 13x P/E for its existing business and DCF (WACC: 10%) for its hydro plant. This implies FY15 P/E of 18.6x but a more palatable 13.5x for FY16 once earnings momentum further kicks in.

Source: Hong Leong Investment Bank Research - 11 Nov 2015