Summary
Future prospects remain bright, driven by strong order book expansion from driven by data center expansions, the NETR initiative and industrial building development.
We revised our core net profit forecast higher for FY24F/FY25F/FY26F, increasing projection by 11.7%/12.4%/11.3% to reflect a higher margin for power cables and wires and an increase in replenishment orders on hand.
We maintain our BUY recommendation with a higher target price of RM1.27 based on 18.0x PER pegged to FY25F fully diluted EPS of 7.1 sen along with three-star ESG rating.
We attended SCG’s post-results briefing last Friday and came away feeling reassured over the Group’s current operations and future prospects. Below are the key takeaways:
Margin expansion. SCG reported a GP margin of 9.9% in 3QFY24, up by 3.4%-pts, driven by favourable product mix in the power segment. Growth was supported by a rise in orders for MV, attributed to increased substation activities in areas with newly established data centres and industrial building developments, both requiring higher power supply. The Group is confident in sustaining current margins, underpinned by (i) better product mix, following higher proportional with 45% of the order book comprise MV, and (ii) growing exports of aluminium cables and wires to U.S. distributors. As of Sep 2024, the Group’s total orders on hand stood at RM699.3m, (47.2% from PO and 52.8% from the orderbook), representing 0.7x FY23 revenue. The Group has a tender book of ~RM700.0m, comprising utility companies and other clients.
US operation performance. SCG’s export market to the US is picking up with stronger momentum, driven by solid order volumes from its sole US distributor. In 3QFY24 alone, SCG shipped c.45 containers of aluminium cables and wires/month, and this figure is expected to increase to 50 containers/month in 1QFY25. To recap, SCG is targeting to double shipments to 100 containers/month within two years by expanding product offerings, with two new aluminium cables and wires awaiting UL Solutions approval. We believe this is achievable, with SCG leveraging onto its competitive pricing and well positioned to benefitting from the ongoing trade dispute developments between the US and China.
Capacity Expansion. As of 9MFY24, SCG’s total annual production capacity stands at 46,980km/year of cables and wires, operating at an 84.0% utilisation rate. Approximately 5% of this capacity is dedicated to the US market. To accommodate the growing demand for cables and wires, SCG has invested in expanding its production line by an additional 5,000km/year, with the new line expected to come online in CY25. In addition, The Group has committed ~RM30m to develop new facilities across 13.3-ac, aiming to boost aluminium cables and wires production capacity by additional 20-30%. Construction is set to start in CY25, with production expected to roll out in stages starting CY26. New facilities will primarily serve the US market.
Outlook. We gathered that ongoing development at Sarawak Cable (PN17) is expected to shift the supply-demand dynamics in the cable and wires market. We anticipate that this will have a significant impact on the MV and HV supply market, especially with a limited number of players in the field. We’ve been informed that new entrants typically require a minimum of two years to ramp
up and speed up productivity. In this context, SCG stands out as a major beneficiary, thanks to its operational advantage of having four CCV lines, while most players only have two. Also, SCG currently is awaiting Certification of Product Acceptance for its 1,600sqm HV Milliken cable, with approvals expected by 3QCY25. On top of that, we expect SCG to pick up a larger slice of the pie
from TNB’s new 1+1 contract cycle, which should be finalised in coming months. With power demand on the rise, driven by data center expansions, the NETR initiative, and industrial building development, we believe SCG is well-positioned to continue thriving in this favorable outlook, given its status as one of the leading manufacturers in the field.
Earnings revision. We raised our FY24F/FY25F/FY26F earnings by 11.7%/12.4%/11.3% to RM68.6m/RM84.8m/RM102.9m respectively, to reflect higher margin in power cables and wires and an increase in replenishment orders on hand at ~RM1.5bn vs previous at ~RM1.0bn.
Valuation & Recommendation. Following the revised earnings forecast, we maintain our BUY recommendation with a revised target price from RM1.13 to RM1.27, based on an 18.0x P/E pegged to FY25 fully diluted EPS of 7.1 sen along with assigned three-star ESG rating. 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 US distributors.
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 4.095157 | 4.126734 |
| EUR | 4.808018 | 4.811741 |
| CNY | 0.582345 | 0.582796 |
| HKD | 0.526309 | 0.529879 |
| SGD | 3.164796 | 3.186440 |