News

• SCable has proposed to undertake a private placement of up to 10% of its share capital or 31.7m new shares.

• The indicative placement price is at RM1.70/ share, which represents a 6% discount to its 5-day VWAP (up to 7 Jan).

Comments

• To pare down debts. The proposed corporate exercise is not entirely surprising considering SCable’s high net gearing of 168% (as of 3QFY15). SCable is expected to raise RM53.9m from the placement, of which 99% be used to pare down its debts. On a proforma basis, SCable’s net gearing would be reduced from 168% to 151%.

• Why the high net gearing? SCable’s high net gearing is mainly due to (i) assumption of debts from the acquisition of Leader Cable and Universal Cable and (ii) higher working capital requirements from the enlarged revenue base from the acquired companies. While this high net gearing posing as a concern, it is somewhat justified by SCable’s strong earnings step up. SCable also offers investors a higher ROE of 14% compared to larger cap contractors at 3-10%.

• Other means to de-gear. Overall, we are positive that SCable is taking steps to address its high net gearing. Other potential de-gearing moves would include (i) disposal (i.e. sale and leaseback) of its helicopter fleet under Ariel Power Lines which could raise RM100m and (ii) cash flow contributions from its soon to be commenced Kombih3 hydro plant in Sumatera which is fully equity funded.

Risks

• Apart from the high net gearing, continued depreciation of the ringgit against the US dollar is another risk as there is a time lag for SCable to pass on the higher raw material (i.e. copper and aluminium) cost.

Forecasts

• Unchanged for now but we note that interest cost would be reduced from the paring down of debt.

Rating

• Maintain BUY, TP: RM2.49
• SCable has strong growth potential driven by its previous acquisitions, superior orderbook cover and a new earnings stream from its hydro plant. The impending Sarawak elections are an added booster as investors scavenge for such plays.
• SCable is also a cheaper proxy to Sarawak’s growth theme with P/E valuations at a 50% discount to CMS.

Valuation

• We adjust our SOP based TP to account for the dilution from the impending placement exercise. However, this is partially offset from the increase our P/E target from 13x to 14x. We reckon this is justified as interest in Sarawak election plays are gaining traction with the polls rumoured to take place towards the end of 1Q16.

Source: Hong Leong Investment Bank Research - 11 Jan 2016