Summary
>30 years track record in manufacturing cables and wires, with notable clienteles include TM, TNB, Petronas, SESB and SEB.
Growth prospects are promising, driven by gradual ramp up in capacity catering towards 1) expansion into HV cables, which are essentially used for national grid upgrades and solar farms, 2) fulfilling demands from KTMB, buoyed by upcoming national infrastructure development and 3) ongoing efforts to gain market share in the US (aiming to double shipments to 100 containers/month from the current 50). As of 2QFY24, the Group holds an order book of RM923.1m, representing a cover ratio of 0.9x against FY23 revenue of RM1.1bn.
We initiate coverage on SCG with a BUY recommendation and TP of RM1.08 based on 18.0x PER pegged to FY25 fully diluted EPS of 6.0 sen.
Investment Highlights
Proxy to national upgrading of HV underground cables. In response to the growing electricity demand from data centers (DCs), TNB plans to upgrade existing cable size from 800sq.mm² to 1600sq.mm² conductors to boost power capacity. This aligns with the national NETR, which plans to invest RM120bn of the total RM420bn for new transmission development. To benefit from this initiative, SCG is awaiting UL certification for its 1,600sq.mm² HV Milliken cable, with approvals expected by 3QCY25. As one of the handful vendors to TNB, we estimate SCG will be able to tap into an addressable market of RM730m/pa over the next 25 years, putting it in a sweet spot to uplift Group’s margin in FY26F (core net profit margin projected at 6.4% vs 2.8% in FY23) as HV cables generally command better margins.
Geographical expansion particularly to US market. To mitigate concentration risk from Malaysian clients, SCG aims to beef up exports to contribute c.30% of total revenue in the long run. In 1HFY24, exports only made up 3% of total revenue, reaching RM17.2m, with the US market contributing about 50% of this amount. SCG is targeting RM50m in terms of revenue from the US by the end of FY24 and plans to double shipments from 50 to 100 containers/month within two years. Future growth will be driven by (i) expansion of product offerings, with two new aluminum cables awaiting UL solutions approval, (ii) capitalisation of geopolitical tensions between the US and China, and (iii) investment of ~RM30m in new facilities over 13.3ac to boost aluminum capacity by 20-30%, with construction slated to begin by CY25.
Riding the solar energy wave. To achieve the nation’s ambitious goal of a 70% RE capacity mix by 2050, back-of-the-envelope calculations indicate that Malaysia needs to increase RE capacity by an average of 2.2GW/pa until 2050. We see SCG is well-positioned to benefit the initiative as 1) one of local producer of TÜV SÜD-certified solar PV cables 2) capability to supply the full range of cables used in solar PV systems 3) increasing demand for 132kV HV underground cables, which are essential for 50MW solar farms. With the upcoming 800MW CGPP and 2GW LSS5 projects, SCG should stay busy over the next three to four years with sustainable orders from solar-related projects.
Capitallising on data-center growth. Beyond national development, SCG is also gaining traction in the private sector, particularly from DC projects. DC orders are characterised by their fast-paced nature, with delivery requirements usually under two months. As YTD, SCG has secured RM100m in PO for building cables for DC-related. Channel checks indicate that, on average constructing a 1MW data center, c.10~25% of the project cost will be allocated to cable systems, highlighting the important role played by cables in these projects. Separately, According to TNB’s latest filing, 26 electricity supply agreements have been signed, totaling c.4GW of power demand. Of these, 2 projects (0.63MW) are under construction, while 8 projects (1.7MW) have just been signed, signaling a potential order pipeline for SCG in cable supply.
Riding onto nation infrastructure growth. SCG has a strong track record in supplying cables for railway projects, serving as one of the preferred brand providers for KTMB and a supplier for the MRT1 Kajang Line and MRT2 Putrajaya Line. This proven track record helped SCG secured an RM18m contract for the Kelantan section of the ECRL project. Moving forward, we expect additional cable demand from railway projects, with a combined length exceeding 500km; (i) MRT3 circle line (51km), (ii) HSR (350km), Penang LRT (28km), Johor’s LRT (4km), Johor’s ART (50km), and Internal rail link within JB (30km). We believe these projects will position SCG favorably, potentially keeping the Group busy in coming years.
Strong order replenishment prospects. SCG holds an order book of RM923.1m, with a cover ratio of 0.9x against FY23 revenue of RM1.1bn, ensuring earnings visibility over the next 12 months. c.60% derived from TNB’s 1+1 contract for underground cables and conductors. In of 1HFY24, the power segment remains SCG’s main contributor, generating around 90% of gross profit. We reckon margins are expected to gradually improve, driven by national grid upgrades requiring HV cables and a shift towards 132kV infrastructure by solar contractors, which fetches better margin. With strong track record, SCG is positioned to capture >25% of TNB’s contracts (from past 20%), offering solid growth prospects.
Valuation & Recommendation
We initiate coverage on Southern Cable Group Berhad with a BUY recommendation and a target price of RM1.08, based on 18.0x FY25's fully diluted EPS of 6.0 sen. The assigned P/E multiple represents a premium of +1.0 standard deviations above its two-year historical mean P/E.
We believe the premium is reasonable, justified by: i) SCG being one of the few approved vendors of TNB, having secured 20% market share on average, ii) SCG owning four Continuous Catenary Vulcanisation (CCV)* Lines, whereas other players on average only have two, iii) their venture into the 132kV HV market, currently undergoing a trial run and expected to be operational by FY25, and iv) SCG being one of the few vendors for U.S. distributors, benefiting from geopolitical tensions and trade diversion.
Risk to our call include: (i) Highly dependent on the power industry, (ii) Fluctuations in plastic resin prices, and (iii) Highly dependent on the key customers.
Disclaimer
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Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of Apex Securities Berhad and are subject to change without notice. Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 4.444781 | 4.475637 |
| EUR | 4.686947 | 4.691456 |
| CNY | 0.611684 | 0.612285 |
| HKD | 0.571216 | 0.575189 |
| SGD | 3.302218 | 3.325297 |