Expanding margin amid sliding commodity price. We reckon the recent slide in commodity price, namely plastic bodes well for SCGBHD. To recap, SCGBHD experienced a margin squeeze during the commodity boom as the group was unable to transfer the spike in plastic price (made up 10-15% of the cable cost) to customers, given that cable price adjustment is dependent on copper and aluminium prices only (but not the plastic component). Hence, as 80% of the order book in hand is secured with higher plastic cost assumption, the slide in plastic price (Figure #1) will translate into margin expansion.

Strong power demand. With Malaysia accounting for 97% of the group revenue, we reckon the strong power demand recovery arising from the reopening economy will drive SCGBHD’s power cable sales to greater heights. To recap, Tenaga has set aside RM11.8bn for FY22 capex (the highest since pandemic) with the plan to spend more on its grid system, taking cue from the strong power demand recovery following Malaysia’s transition to endemicity. In 3QFY22, SCGBHD secured its largest-ever contract win of RM294m underground power cables and conductors supply contract from Tenaga, with current orders in hand standing at RM828m, implies a 1.25x sales cover. In view of strong order book coupled with picking-up demand from the private sectors amid the strong FDI (especially in Penang where SCGBHD has strong presence), we are sanguine about SCGBHD’s prospect.

Making further inroad into overseas market. 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 10 years, supported by the Myanmar National Electrification Project. Separately, SCGBHD is in the midst of penetrating US market via its in-house developed XHHW-2 industrial cables, which command a better margin. We gather that SCGBHD will deliver the trial orders to US-based customer in the coming months and is optimistic to secure the distributorship agreement afterward.

Building a base: Technically, SCGBHD is building a base near the RM0.32-0.34 support area. A decisive breakout above RM0.38 will form a double bottom and spur the price toward RM0.40-0.42-0.45. Cut loss at RM1.66.

Source: Hong Leong Investment Bank Research - 23 Sept 2022