Southern Cable Group Berhad - Replenished another long-term contract
Fri, 27-Dec-2024 07:14 am
by Tan Sue Wen • Apex Research

Counter

SCGBHD (0225)

Target Price (RM)

1.63

Recommendation

Buy

Summary

  • Secured a new long-term contract from East Malaysia for RM172.6m, boosting orders in hand to RM871.8m, equivalent to 0.8x of FY23 revenue.

  • We revised our core net profit forecast for FY25F/FY26F, increasing projections by 7.3%/6.2% to reflect stronger replenishment orders on hand.

  • We maintain our BUY recommendation with a higher target price of RM1.63, based on an 18.0x P/E ratio pegged to FY26F fully diluted EPS of 9.1 sen, along with a three-star ESG rating.

     

  • Another long-term contract win. SCG has secured a new long-term contract worth RM172.6m from Customer A for the supply of cables and conductors to East Malaysia. The contract covers a mix of products, ranging from LV to HV, and will commence until December 2026.

     

  • Our Takes. With a conservative high-single-digit GP margin assumption, this could translate to an annual GP of c.RM8m, which is 5% of our forecasted Group GP level. This latest win also bumps SCG’s orders in hand to RM871.8m, equivalent to 0.8x FY23 revenue of RM1.05bn. As of 9MFY24, East Malaysia contributed about RM110.0m, representing approximately 10% of total revenue. We are positive over this news, as it diversifies away from TNB's concentrated risk in West Malaysia, which we reckon has contributed up to 80% of orderbook.

     

  • Outlook. Although East Malaysia's contribution is currently around 10%, we believe this will continue to grow premised to SCG position as one of the leading suppliers of cables and conductors, playing a key role as one of the major export suppliers to the East Malaysian market. Additionally, considering that the current TNB 1+1 contract is nearing the end of its yearly extension period, we anticipate that the next round of contract awards could provide another boost to SCG's order book in the near to medium term. On top of that, with the NETR and data center expansions, there is a stronger need for grid upgrading. We estimate the addressable market for HV cables to be around RM80bn, with only four key players providing HV cables and wires in the market including SCG, presenting approximately RM730m/annum opportunities for each player, ensuring a sustained long-term orders replenishment. To recap, SCG currently is awaiting Certification of Product Acceptance for its 1,600sqm HV Milliken cable, with approvals expected by 3QCY25. We expect margins to scale up, due to a better product mix in the local market and increased exports to the US market.

     

  • Earnings revision. We raised our FY25F/FY26F earnings forecasts by 7.3%/6.2% to RM91.0m/RM109.3m respectively. The revision is to reflect the stronger replenishment orders on hand to c.RM1.5bn for FY25F onwards, as we are confident that SCG will secure more contracts with the recent East Malaysia project win.

     

  • Valuation & Recommendation. We maintain our BUY recommendation with a revised target price from RM1.27 to RM1.63, based on an 18.0x P/E pegged to FY26 fully diluted EPS of 9.1 sen, along with an assigned three-star ESG rating. We have rolled over the valuation base to FY26F EPS (from FY25F EPS) based on an unchanged P/E ratio of 18.0x. We continue 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.

     

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

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