Being a power cable manufacturer, we believe SCGBHD is set to capitalize on higher electricity demand from both the public and private sectors, following Malaysia's transition to the endemic phase. On top of that, the group’s strategy to penetrate overseas markets, like Myanmar (whose plan is to achieve a 100% electrification rate over the next eight years), should lift SCGBHD's earnings to record a strong 29% CAGR for FY21-24. We value SCGBHD at RM0.42/share, ascribing a 17.6x PE to FY23 earnings.

Power cable specialist. Listed on the ACE Market in Oct 2020 and subsequently transferred to the Main Market in Oct 2021, SCGBHD is a manufacturer of cables and wires used in power distribution, communications, and control and instrumentation applications. Through its factories in Kuala Ketil and Sungai Petani, Kedah, the Group has a total annual production capacity of 36k MT of aluminium and copper rods, 34km of cables and wires, 7.8k MT of PVC compounds and planned new plastic compounds (i.e. PO/XLPE/PE c.4.2k MT) by 2023. Currently, SCGBHD is the registered supplier of cables and wires for major utilities and O&G companies such as Tenaga, Sabah Electricity SB, TM, MRT Corp and Petronas. In FY21, the domestic market (Malaysia) remains SCGBHD's bread and butter (c.97%), whilst Indonesia, Myanmar, Cambodia and other regional countries account for the rest.

Promising power cable outlook. We reckon that SCGBHD is set to capitalize on the higher electricity demand following Malaysia's transition to the endemic phase. In 1QFY22, Tenaga witnessed electricity demand growth at 4.0% YoY (Peninsular), and expects a full year growth of 1.7% in 2022. With this, Tenaga had set aside RM11.8bn for FY22 capex (the highest since pandemic), with the plan to spend more on its grid system. Separately, we gather that the demand for power cables from the private sector has also picked up on strong FDI inflow, which registered RM788.8bn (+12.8% YoY) in FY21 with manufacturing (42% of the FDI) being the main contributor. Particularly, the demand for power cables comes from Batu Kawan industrial and Kulim Hi-Tech hubs. Adding in yesterday’s contract win from Tenaga (contract value of RM293.8m), current orders in hand of RM816.3m implies a cover of 1.23x.

Making further inroads into oversea s markets. SCGBHD will focus on growing its export sales by tapping into oversea markets such as Myanmar, Cambodia, Vietnam and US. In particular, the Myanmar market is set to grow over the next eight years amid rapid urbanization. Spearheaded by the Myanmar National Electrification Project (NEP) in 2017, domestic electrification rate is envisaged to achieve a 100% by 2030 to provide electricity access to all Myanmar households. Separately, the group is in the midst to penetrate into US market via signing a distributorship agreement with a US-based customer (targeting 3QFY22) for its in-house developed XHHW-2 industrial cables, which command a better margin.

Forecast. All in, we are projecting SCGBHD’s core PATAMI to register a strong 29% FY21- 24 CAGR. Despite facing higher input costs from metal-based materials such as copper and aluminium, and non-metal-based materials including plastic and sawn timber, we expect a gradual margin recovery, on the back of revival of overall, industrial, construction and infrastructure projects, upward adjustment in the pricing, enhanced product portfolio (e.g. automotive wires, elevator cables, aluminium solid conductors, solar PV cable, single PVC low voltage cable and XHHW-2 industrial cables) as well as burgeoning export sales prospects (targeting 20% of turnover by FY25 vs 7% in FY20).

Fair Value of RM0.42. Due to the limited comparable peers in domestic market, we extend our search to include global players which have high degree of similarities to SCBGHD’s business operations (see Figure #3). As such, we arrive with a fair value of RM0.42, ascribing a 17.6x FY23 P/E (simple average of global and local peers’ valuation) to FY23 EPS of 2.4sen. We believe the assigned P/E multiplier is fair given SCGBHD’s superior core PATAMI FY21-24 CAGR of 29% (vs peers: 16%). This FV translates into 1.12x FY23 P/B, which is significantly lower than the peers’ average of 2.8x.

Source: Hong Leong Investment Bank Research - 19 Jul 2022