Sarawak Cable - From little acorns grow a mighty oak BUY

- Maintain BUY on Sarawak Cable (S Cable) with an unchanged fair value of RM2.50/share – based on the sumof-parts methodology. S Cable is set to built its first mini hydropower plant in Indonesia, according to The Star. This comes after it had secured a financing of US$15mil (RM45mil) from a local bank to fund the mini-hydro dam project that is located within the North Sumatra region.

- S Cable had previously intimated its intention to set aside some RM80mil to fuel its mini-hydro development footprint. With more than half of the required funding already secured, we do not envisage S Cable to face any difficulties in raising the balance. The group’s balance sheet position remains strong (FY12F net gearing: ~10%).

- Last January, S Cable paid RM5.5mil to acquire a 65% stake in Pt Inpola Mitra Elektrindo (IME), which has been awarded a Power Purchase Agreement (PPA) by PT Perusahaan Listrik Negara (PLN) Persero  that comes with the rights to design, finance and construct a mini-hydro power plant in North Sumatra. Once completed, IME’scontract comes with a renewable concession to sell electricity to PLN for a period of 20 years.

- Further out, the group intends to deepen its mini-hydro footprint in Peninsular Malaysia. To be sure, it is already conducting feasibility studies on five proposed mini-hydro dam projects. The studies would be completed this year.

- Thus far, three project proposals have been approved by the relevant state governments and Tenaga Nasional Bhd (TNB), while S Cable is still locked in negotiations for the other two.  As the first plant would likely take approximately 18 months to complete, we have yet to account for it in our earnings forecasts pending more details.

- But, we see rising contract momentum for S Cable in the immediate term – particularly in its strategic positioning to secure more transmission line jobs within SCORE. Via Trenergy Infrastructure – due to be acquired by S Cable – it is one of only two parties vying for Phases 1 & 2 of the 500kV Sarawak backbone transmission line project worth up to RM3bil. A decision could be known by next-month.

- Based on just a 20% share (~RM400mil) of the transmission portion of the 500kV job, we estimate this to potentially triple S Cable’s outstanding contracts (including Trenergy) to ~RM600mil – suggesting moreupside to our FY12F new order book forecast of RM550mil.

- The proposed acquisition of a 100% stake in Trenergy and buying out of Sarwaja Timur – targeted by end-3Q12  –  should also help plug minority leakages and transform the group into an integrated transmission line specialist.  

Source: AmeSecurities