AmWatch - Sarawak Cable : Eyeing more jobs and better margins in the West, 4 Nov 2014

STOCK FOCUS OF THE DAY

Sarawak Cable : Eyeing more jobs and better margins in the West           Buy

We maintain BUY on Sarawak Cable Bhd with an unchanged SOP-based fair value of RM1.70/share, which implies a PE of 9x FY15F EPS. We hosted a company visit with clients and came away upbeat on the group’s prospects. Management affirmed our view that the proposed acquisitions of 100% stakes in Universal Cable (M) Bhd (UCMB) and Leader Cable Industry Bhd (LCIB) are earnings-accretive. Our stance is premised on management’s plans to improve margins of the two cable manufacturers post-acquisition by leveraging on economies of scale and improving efficiencies.

Management intends to streamline the businesses of the companies by focusing on medium voltage and high voltage cables, which command higher margins. The group also intends to move its capacity at the Nilai plant to Sabah in order to capture the demand there. Currently, all cables are transported to Sabah from West Malaysia. The consolidation of operations in Peninsular Malaysia (with a combined ~50% market share) will also put the group in a better footing to secure more transmission jobs. 

Last week, Tenaga Nasional Bhd announced that it will spend RM23.3bil (or RM6bil p.a.) over 2014-2017 to improve the national grid. We expect the enlarged SCable group to secure a significant portion of the jobs given its capacity. Other prospective jobs include transmission lines in RAPID, Pengerang as well as the cable tunneling system for the RM9bil LRT 3 project.

While management has put in place a strategy to improve margins, we have conservatively imputed a blended PBT margin of ~3% for the cable division (vs. the acquired companies’ ~2%). We have also conservatively imputed a new order book replenishment of ~RM200mil for FY15F-16F.

Further upside stems from better-than-expected margin improvement and higher job wins. While earnings growth is expected to be muted this year, we expect contributions from the 500kV job as well as the RM943mil Balingian job to come in strongly in FY15F-FY16F. We maintain BUY with potential upside adjustments pending the completion of acquisitions.

Others :

Malaysia Airports Holdings :  Continues to be hit by klia2 costs    Hold

QUICK TAKE

Eastern & Oriental : Granted SC approval on the bond issue; EGM to be held by end-November                Buy

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Oil and Gas Sector : PIPC to be operational by 2019

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