Sarawak Cable - 3Q below; pick-up expected with Trenergy in the ring BUY

- Maintain BUY on Sarawak Cable (S Cable) with a lower sum-ofparts- (SOP) derived fair value of RM2.02/share (previously: RM2.22/share) on lowered earnings, as 3QFY12 net profit of RM2mil fell short of our expectations. 

- While we expect a stronger 4Q on a full-quarter contribution from recently-acquired Trenergy Infrastructure – the earnings slippage mainly came from:- (i) a one-month less contribution from Trenergy effective 5 August (vs. our previous six-month estimate); and (ii) margin compression for its cable/fabrication divisions. 

- That said, we expect the injection of Trenergy – at an implied PE of only 4x – to start contributing immediately to group’s earnings expansion. It has raked in RM2mil in pre-tax profit alone from its date of acquisition or roughly 37% of the enlarged S Cable group’s 9MFY12 pre-tax profit of RM8mil.

- Most importantly, the injection of Trenergy would complete S Cable’s transformation into an integrated transmission line specialist. With Trenergy on board, S Cable is strongly positioned to bid for Sarawak’s 500kV backbone line, for which the transmission package is reportedly to be worth ~ RM1bil.

- While there have admittedly been delays in the roll-out, we expect a firm decision from the project to materialise over the next one to two quarters – as the 500kv line is expected to be completed by end-2014.

- Likewise, the same can be said for a resumption of spending on rural electrification projects in 2013, where S Cable is the dominant supplier of fabricated products and cables – the latter under Sarwaja.  

- This is due to the urgent need to boost Sarawak’s power infrastructure to support the committed heavy industry investments in SCORE – notably within the Samalaju Industrial Park. 

- To be sure, the future power available from both the Bakun and Murum dams has already been pre-committed – the bulk of which would be used by investors operating within Samalaju.

- Beyond the near-term earnings weakness, we expect the groups’ revised net profit to expand three-fold to RM31mil in FY13F (FY12F: RM10mil). This is backed by a 4x increase in new contract assumptions at RM600mil against an estimated RM150mil new jobs that have been procured year-to-date (mainly of Trenergy).

- An added comfort is the fact that its key management – i.e. chairman Datuk Seri Mahmud and MD Toh Chee Ching – took up half of the placement. This fortifies our conviction of more robust prospects for the group going forward.    

Source: AmeSecurities