Southern Cable Group Berhad - Secured new cycle of long-term contract
Thu, 20-Feb-2025 07:20 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 TNB for RM403.6m, boosting orders in hand to >RM1bn. The award comes with an option for a 30% add-on based on the contract value.

  • The option is highly likely to be exercised, along with additional orders equivalent to the original contract value, boasting the total contract value to RM1.3bn over the next two years.

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

 

New long-term contract win. SCG has secured a long-term contract valued at RM403.6m from TNB for the supply and delivery of LV and MV underground cables and conductors for the distribution division. The contract charter one year extension and will commence until Feb 2027, with an option for a 30% add-on based on the contract value.

 

Our Takes. Assuming the contracts constitute a significant proportion of MV underground cables and conductors, the exercise of the 30% option, coupled with a double-digit GP margin, could translate into an average annual GP of RM59m, representing 35% of our forecasted Group FY25 gross profit. We believe the option is highly likely to be exercised, along with additional orders equivalent to original contract value, boasting total contract value to RM1.3bn over the next two financial years. During the previous cycle (2022–2024), the option was exercised and SCG secured contracts worth more than RM800m. These contracts ramped up order book on hand to >RM1.0m.

 

Outlook. This not only represents the largest value secured to date but also underscores SCG’s position as one of the preferred vendors for TNB’s source of procurement. According to NETR, there is a stronger need for grid upgrading with a total capex of RM420.0bn. Approximately more than half of aforementioned value will be allocated to transmission, 29% to distribution, and remainder to BESS. That aside highlighted the stronger needs for power cables and wires ranging from LV to HV. As a result. we believe that SCG could still potentially secure more contracts from TNB, particularly when current supply production remains tight while demand continues to rise.

 

Earnings revision. Maintained, as contract win falls within our orders in hand replenishment assumption of RM1.5bn for FY25F.

 

Valuation & Recommendation. We maintain our BUY recommendation with an unchanged target price of RM1.63, pegged to a 18.0x P/E based on FY26 fully diluted EPS of 9.1 sen, along with an assigned three-star ESG rating. We continue like SCG for its (i) role as a proxy for Malaysia’s growing power demand, (ii) increasing demand for HV power cables, and (iii) position as one of the few vendors supplying US distributors.

 

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

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