Southern Cable Group Berhad - Robust earnings growth sustained
Wed, 27-Nov-2024 07:56 am
by Tan Sue Wen • Apex Research

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SCGBHD (0225)

Target Price (RM)

1.13

Recommendation

Buy

Summary

  • SCG reported 3QFY24 core net profit of RM18.6m (+28.7% qoq, +185% yoy) and 9MFY24 core net profit of RM47.1m (+177% yoy), which was above our/consensus' expectations, accounting for 81.9%/82.2% of our/consensus' full-year estimate.

  • We revised our earnings forecast for FY24F/FY25F/FY26F, increasing projection by 6.9%/4.6%/3.0% toreflect a higher margin in power cables and an increase in replenishment orders on hand.

  • Maintain our BUY recommendation with a higher target price of RM1.13 based on 18.0x PER pegged to FY25 fully diluted EPS of 6.3 sen. 

     

Results Review

  • Beat expectations. SCG's 9MFY24 results came in stronger than expected, with a core net profit (CNP) of RM47.1m, which makes up 81.9%/82.2% of our and consensus full-year estimates. The outperformance was mainly driven by better-than-expected sales and product mix in the power segment. A first interim dividend of 0.75 sen/share was declared.

     

  • QoQ. 3QFY24 CNP climbed +28.7% qoq to RM18.6m, with revenue rising 21.7% qoq to RM383.6m. The strong earnings performance was largely due to better contribution in power segment (GP +22.6%), supported by increased sales volume and a more favorable product mix, especially a higher proportion of MV cables and wires that commands better margins. This is despite the Communication and Control & Instrumentation segments registering weaker earnings performance, down 29.1% and 13.3% respectively, due to softer domestic market sentiment. 

     

  • YoY/YTD. CNP jumped nearly threefold, up +184.6% yoy (+176.7% YTD) to RM18.6m, thanks to significantly better gross profit in the power segment (+134.4% yoy, +112.8% YTD), driven by capacity expansion and the favorable factors mentioned earlier. As a result, earnings margin surged to 4.8%, up from 2.4%.

     

  • Outlook. Thanks to reduced production capacity in the industry following the shutdown of a few competitors, SCG is in a sweet spot to capitalise on the imbalance between supply and demand. As a result, we expect SCG to keep gaining momentum, with more billings coming in from power cables and wires over the next few quarters. On top of that, we anticipate SCG to secure more project wins, particularly with TNB’s upcoming 1+1 contracts, which should be finalised in coming months. With the increasing demand for power infrastructure, driven by the TNB’s grid upgrade plan, solar development, industrial buildings development, and the rapid expansion of data centers, these factors will further benefit SCG, as a leading manufacturer in the field. As of Sept 24, the Group’s total orders on hand stood at RM699.3m, with 47.2% from purchase orders and 52.8% from the orderbook, representing 0.7x FY23 revenue.

     

  • Earnings revision. We raised our FY24F/FY25F/FY26F earnings by 6.9%/4.6%/3.0% to RM61.4m/RM75.4m/RM92.5m, to reflect higher margin in power cables and an increase in replenishment orders on hand at ~RM1bn vs previous at ~RM900m.

     

  • Valuation. Following the revised earnings forecast, we maintain our BUY recommendation with a revised the target price from RM1.08 to RM1.13, based on an 18.0x P/E pegged to FY25 fully diluted EPS of 6.3 sen. We like SCG for its (i) role as a proxy for Malaysia’s growing power demand, (ii) expansion into the HV market, and (iii) position as one of the few vendors supplying U.S. distributors.

          

  • Risks. Heavy reliance on power industry. Escalation in plastic resin prices. Intense market competition

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