Sarawak Cable - Trenergy IS the missing puzzle Buy

- Maintain BUY on Sarawak Cable (S Cable), with our fair value lowered from RM2.48/share to RM2.22/share, based on the sum-of-parts (SOP) method. 

- This reflects:- (i) a private placement of 20 mil new S Cable shares (15% of issued capital); (ii) more conservative margin forecast for its power cables/fabrication units; (iii) shift in the timing of new job prospects to 2013, notably the 500kV Sarawak backbone transmission line; and (iv) six-month consolidation of Trenergy Infrastructure – i.e. from 2H12 onwards (previously: full-year recognition). 

- The placement is set to raise some RM32mil to help part finance the acquisition of a 100% stake in Trenergy and buying out of Sarwaja Timur totalling RM76mil. S Cable would fund the balance RM44 mil via a combination of internal proceeds and new debt. Yet, its FY12F net gearing position would remain comfortable at 24%. The entire deal is set to be consummated by the end of this month.

- We are positive about it. Firstly, S Cable is expanding its capital base ahead of renewed job prospects and a solid earnings outlook (FY12F-14F EPS CAGR: 79%). Secondly, the acquisitions are value-accretive at implied PEs of only 4x for both Trenergy and Sarwaja Timur.  

- Thirdly, the strategic moves by key management – i.e. Chairman Datuk Seri Mahmud and MD Toh Chee Ching – to take up half of the placement shares signals an increasing belief in the group’s future prospects. Fourthly, a fullconsolidation of Sarwaja would eliminate future earnings leakages of its fabrication business. 

- Most importantly, the injection of Trenergy would complete S Cable’s transformation as an integrated transmission line specialist. Hence, we believe S Cable warrants a re-look for investors seeking exposure to Sarawak Energy’s (SEB) RM22bil power agenda for SCORE.

- With Trenergy on board, S Cable is strongly positioned to bid for Sarawak’s 500kV backbone line, where the transmission package is reportedly worth around RM1bil. A decision could be known by month-end.

- Just based on a 40% or RM400mil from this job, S Cable’s order book (construction only) could triple to ~RM600mil by end-2012. Also, Trenergy offers more than just prospects within SCORE. Since 2002, it has secured over RM1bil worth of jobs throughout Malaysia – signifying the group’s progression as a leading transmission line contractor.

- Valuation wise, the stock is trading at alluring forward PEs of only 6x-7x on FY13F-14F EPS against solid financials (FY12F net gearing: 24%) and ROEs of 20%-22%.  

Source: AmeSecurities