Friday 29 Mar 2024
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This article first appeared in The Edge Financial Daily, on June 27, 2016.

 

KUALA LUMPUR: The end of Sarawak’s pre-election rally and poor first-quarter results have sent Sarawak Cable Bhd’s (SCable) shares tumbling 28% from a five-year peak of RM1.82 on Jan 8.

The stock closed 3.68% lower at RM1.31 last Friday, with a market capitalisation of RM421.68 million.

However, a restructuring of its business and the commencement of the first of five mini-hydropower plants in Indonesia by the fourth quarter of this year (4Q16) might spell the end of the downward spiral in the cable manufacturer. The plant is expected to bring in up to RM30 million in annual recurring revenue.

“We expect to see immediate income contribution of about RM7 million from the mini-hydropower plant in 4Q16. The operational cost will be very small as we will be using water [to produce electricity],” its managing director and chief executive officer Aaron Toh Chee Ching told The Edge Financial Daily in an interview.

The plant is located in Sumatra, with a capacity of 10mw and estimated installed capacity of 14mw. SCable had signed an agreement with Perusahaan Listrik Negara Persero to sell the electricity produced to the Indonesian utility body for 20 years.

Still, the group’s current share price and earnings forecast have yet to reflect the lucrative long-term income stream of the power plant.

“[The] market is ascribing little valuation to the power plant. Based on our forecast, contribution from the plant could enhance our forecast for the financial year ending Dec 31, 2017 (FY17) and FY18 by 20% to 23%,” Hong Leong Investment Bank senior analyst Jeremy Goh said in an email.

Goh deems the power plant a lucrative business as the tariff and demand have been fixed by the Indonesian government under the power purchase agreement (PPA).

Based on the PPA, the initial tariff rate is 778 rupiah (23 sen) per kWh, with the subsequent increase to 968 rupiah per kWh. Earlier this year, the tariff was increased to 1,390 rupiah per kWh.

Goh expects SCable’s share price will react when the power plant starts to contribute to the group’s earnings.

According to Toh, commencement of its power plant was delayed from June to September this year due to additional rock blasting works at the plant.

Meanwhile, the group’s high gearing ratio of 183% is also a concern for investors. Its net debt stands at RM417 million.

Toh estimates that SCable needs up to RM80 million to develop each power plant.

Construction of two new power plants will begin next year, while the rest are waiting for approval from the Indonesian government.

To pare down debt and generate cash, Toh said the group is in talks with foreign strategic partners for a possible spin-off of its power assets in bourses like Singapore and Hong Kong next year.

“Singapore and Hong Kong are my ideal locations as there are more investors who are keen on investing in the renewable power industry,” he said. “However, it will be difficult for us to list by ourselves. Thus, we have to ride on other listed entities, which may see us injecting some of our power assets into the company and then go for an IPO (initial public offering) to raise funds,” he added.

On Jan 18, Toh was reported to have said that the group was in talks to rope in a Singapore-listed construction company for a potential stake sale of its mini-hydro plants in Indonesia.

He believes that the group’s power assets will fetch a better valuation once the power plant in Indonesia commences.

Toh also expects SCable to post improved net profit in FY16. Its net profit rose 64% to RM39.8 million in FY15 from RM24.23 million the previous year as revenue grew 329% to RM1.45 billion from RM339.44 million in FY14.

However, the group saw its net profit fall to RM3.57 million in the first quarter ended March 31, 2016 (1QFY16) from RM11.87 million a year ago, due to delay in projects for orders in hand to subsequent quarters in this financial year. This was despite a 6% increase in revenue to RM364.46 million from RM343.61 million in 1QFY15.

Toh said based on its latest two months’ performance guide, the group has started cost-saving initiatives of its manufacturing activities,  which have shown some results.

“We are targeting to save at least 1% to 2% [or about RM60 million in operational costs] this year,” he said.

Toh said the profit margin for its power and telecommunication cables is merely 2%, but he hopes to double it by reducing the material wastage and time lost, which will contribute directly to the group’s bottom line.

Other than the power plant, the completion of the 500kV transmission backbone project in Sarawak worth RM618 million and a RM257.02 million overhead transmission line job in Pengerang, Johor will also lead to a higher earnings contribution in FY16.

The group’s order book currently stands at more than RM1.5 billion, of which RM1 billion is for the power transmission line project and the remaining RM500 million is for cable orders.

On the disposal of its loss-making wholly-owned subsidiary Aerial Power Lines Sdn Bhd (APL), Toh expects to wrap up negotiations soon.

“The selling of APL is not like selling a plant. We have one or two potential buyers, but they have laid out some conditions to streamline APL and we have to start by selling off some helicopters,” Toh explained. APL currently operates six helicopters and will take delivery of two more.

The group is in the midst of negotiating with two interested buyers on its EC225 helicopter that is worth close to RM100 million.

“Hopefully, we can seal the deal in the next three months. APL will only break even after the disposal of the EC225,” he said, adding that APL is still in a loss of RM900,000 today.

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