Sarawak Cable Bhd
(Oct 23, RM1.34)
Upgrade to “buy” with fair value of RM1.70: We upgrade Sarawak Cable or SCable to buy (from hold) with a higher sum-of-parts (SOP)-based fair value of RM1.70 per share (vs RM1.60 per share previously) — which implies a price-to-earnings ratio (PER) of nine times financial year ended Dec 31, 2015 forecast (FY15F) earnings per share.
We have computed SCable’s proposed acquisitions of 100% stakes in Universal Cable (M) Bhd (UCMB) and Leader Cable Industry Bhd (LCIB), as well as contributions from the Balingian job into our model. These resulted in earnings accretion of 51% each for FY15F and FY16F.
On Tuesday, SCable announced that it had entered into a share purchase agreement for the acquisitions of the two companies from HNG Capital Sdn Bhd for RM210 million. We view the acquisitions positively as it will fortify the group as a leading integrated power cable supplier in Malaysia with an estimated 50% market share.
Recall that HNG Capital will guarantee a total profit before tax (PBT) of RM21 million at the companies for FY14F ending Dec 31, 2014. As such, we deem the acquisitions to be fair at 13 times PER. Also, SCable is acquiring the two companies at a 33.5% discount to the aggregated net assets of RM316 million as at end-December 2013.
The two companies are major suppliers of power cables in Peninsular Malaysia. For FY13F, the acquirees had a combined revenue of RM800 million and profit after tax and minority interest of RM8 million. Previous projects included turnkey jobs for 132kV underground power cables in Kulim Hi-Tech Park and Cyberjaya, light rail transit cable (LRT) signalling system, as well as various jobs for Tenaga Nasional Bhd (TNB).
While the companies’ PBT margins are low at 0.5% to 2%, the management plans to improve it via cost improvement strategies. We also understand that the two companies have an outstanding order book of RM698 million that would last about two years.
Looking ahead, SCable is in good position to secure more jobs due to TNB’s cable replacement plans, as well as the cable supply for the upcoming RM9 billion Bandar Utama to Klang LRT 3 project and Refinery and Petrochemicals Integrated Development (or Rapid) project. — AmResearch, Oct 23
This article first appeared in The Edge Financial Daily, on October 24, 2014.