Results

• SCable reported 2QFY16 results with revenue of RM346.2m (+14% YoY, -5% QoQ) and earnings of RM4.9m (-58% YoY, +38% QoQ).

• 2Q results were lower YoY due to margin compression for both the cable and construction division. The QoQ improvement resulted from the cable division swinging back to profitability.

• Cumulative 1H earnings summed to RM8.5m, falling -64% YoY.

Deviation

• 1H earnings made up 24% of our full year forecast (19% of consensus) which is below expectations.

Dividends

• None declared.

Highlights

• Cables recovering. The cable division returned to the black in 2Q with PBT of RM7.3m vs loss of -RM3.7m in the previous quarter due to delayed orders from Tenaga. New orders from Tenaga have started contributing in 2Q and should further improve in 2H but likely at a slower rate than what we had earlier envisaged.

• Weak margins for construction. 1H construction PBT margins suffered a YoY contraction from 10.7% to 4.4%. This was due to certain variation orders which have yet to be approved but its costs were recognised upfront.

• Hopeful for more contracts. SCable has tendered for over RM1bn in transmission line projects. We understand that parent-co Sarawak Energy will roll out another RM600m in 500kV transmission lines next year. In our view, SCable is in a decent position to secure this job given its track record with the current 500kV line. SCable is also aiming to supply 275kV cables for RAPID (including construction) and 132kV cables for the MRT2 (MRT1 was also supplied by them).

Risks

• High net gearing of 170% (partially due to previous acquisitions) remains a concern. This level has further increased from 127% in 1QFY16, resulting from drawdown for its Kombih3 hydro plant which was previously funded via internal funds.

Forecasts

• We cut FY16-18 earnings by 15%, 11% and 10% respectively as we impute slower than expected order deliveries for it cables and lower construction margins. Rating Downgrade to HOLD, TP: RM1.30
• Apart from the weak results, we are increasingly cautious on its net gearing level and hence downgrade our rating from Buy to HOLD.

Valuation

• Apart from our earnings cut, we also reduce our P/E target from 14x to 10x given the less than sanguine results delivery. All in our SOP based TP is reduced from RM1.92 to RM1.30, implying FY16-17 P/E of 13.6x and 10.2x.

Source: Hong Leong Investment Bank Research - 24 Aug 2016