SCOMNET registered steady revenue and net profit of 13% each in FY17. Besides, SCOMNET has bought another 80% stake into their own subsidiary (Supercomal Medical Products Sdn Bhd), which could see expansion in their FY18 results. Besides, copper, being their main raw material, saw a decline in prices. Hence, with the symmetrical triangle breakout after the steep decline in copper prices, we opine SCOMNET is set for a rally. Resistance will be set around RM0.435-0.46, followed by RM0.565. Meanwhile, support will be located around RM0.385 and cut loss at RM0.37.

Company profile. Supercomnet Technologies Berhad (SCOMNET) is involved in the manufacture of PVC compound and cables/wires for electronic devices and data control switches. It has diversified into manufacturing and assembling of automotive cables, medical cable and general usage cables, where the manufacturing plant is located at Sungai Petani. Kedah Malaysia. SCOMNET produces wide range of cables and wires catered for industrial usage and can be classified into few broad categories: (i) automotive cables, (ii) home appliances and general usage cables and (iii) cable for medical products and devices. The two main components of making wires are copper and Polyvinyl Chloride ("PVC").

Increasing revenue and earnings. SCOMNET registered an increase of 13.2% and 13.0% in revenue and net earnings in FY17, respectively on the back of higher demand for wire and cables in the passenger cars segments. Also, SCOMNET has purchased into the remaining 80% stake in its subsidiary Supercomal Medical Products Sdn Bhd in October 2017. Hence, we should be able to see expansion in their revenue and translating to their bottomline moving forward.

Copper prices hit 11-months low.  In the recent months on the back of rising trade tensions between the US and China, copper prices on the London Metal Exchange has been losing steam (Figure #3), declining from the peak of USD7,348 to USD6,228 over the past two months. Hence, we believe the falling raw material cost will be able to boost the earnings at least for the near term.

SCOMNET vs. copper prices. Over the past two years, there are several occasions when the copper prices on a declining trend, SCOMNET prices will react positively with a strong surge in prices within next few months (refer to Figure #4). Hence, we think the downward path on copper prices recently could bode well for SCOMNET for the near term.

Symmetrical triangle breakout. SCOMNET has trended sideways over the past two months before the strong surged this week above the RM0.39 level. The technical indicators are turning positive on the weekly and daily charts. With the recovering in broader sentiment, coupled with the strong breakout with volumes, we may anticipate a follow-through buying support towards RM0.435-RM0.46, followed by a LT target of RM0.50. Support will be pegged around RM0.385-0.385, with a cut loss point set around RM0.37.

Source: Hong Leong Investment Bank Research - 13 Jul 2018