Southern Cable Group Berhad - Exceed Expectations
Fri, 30-May-2025 06:58 am
by Tan Sue Wen • Apex Research

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SCGBHD (0225)

Target Price (RM)

1.720

Recommendation

Buy

 

  • SCGB reported a stellar 1QFY25 core net profit of RM29.1m (+17.5% qoq, +113.7% yoy), accounting for 28% of our full-year forecast. We deem this performance to have exceeded expectations, as we expect stronger performance in the remaining quarters of the financial year. The outperformance was largely due to stronger-than-anticipated margins of power cables and wires in the Power segment.

  • During TNB’s most recent analyst briefing, the management highlighted the signing of 5 ESAs for DC projects with 666MW capacity in 1QFY25 alone and expects another 10 ESAs signed for DC projects (averaging 150MW-200MW each) by year-end. This highlights the resilient demand for MV and HV power cables and wires. SCGB is well-positioned to capture additional demand in the MV and HV segments, where only a few sizeable players remain.

  • Following the stellar quarterly performance, we have revised our margin assumptions for power cables upward, hence raising our FY25-FY27 earnings forecasts by 17%-21%.

  • Post-earnings revision, our TP was revised upward to RM1.72 (from RM1.42), based on 15x FY26F EPS of 11.5 sen and a three-star ESG rating. Reiterate BUY.

 

Exceed expectations. Excluding a one-off forex loss of RM1.7m, SCGB’s 1QFY25 core net profit (CNP) of RM29.1m came in slightly higher than our expectations, representing 28% of our FY25F earnings forecast. We deem this performance to have exceeded expectations, as we expect stronger performance in the remaining quarters of the financial year. The outperformance was largely due to stronger-than-anticipated margins, mainly driven by more favourable product mix of cables and wires in the Power segment.

 

QoQ. CNP grew by 17.5% to RM29.1m, mainly attributed to higher contributions from the Power segment (+16.3% in segmental GP), driven by increased sales volume of power cables and wires, supported by robust demand for national connectivity. Usage of power cables and wires in transmission and distribution projects have been more prevalent by contractors. These gains were partially offset by a surge in administrative costs (+82%).

 

YoY/YTD. 1QFY25 CNP more than doubled, primarily driven by robust contributions from the Power segment, as evidenced by a 112.4% increase in segmental GP. The significant uplift was largely attributed to sales growth (segmental revenue +32.0% yoy) and margin expansions. Notably, the GP margin for the Power segment surged 5.0%-pts yoy to 13.2% in 1QFY25, reflecting a more favourable product mix, with growing demand for HV and MV cables (typically command superior margins), collectively accounting for over 30% of segmental revenue in 1QFY25. The stellar margin was also likely supported by lower raw material cost, particularly plastic compounds, as well as cost efficiencies achieved through economies of scale.

 

Outlook. We expect SCGB to continue delivering qoq and yoy improvements in earnings for the remaining quarters of FY25, supported by a robust total orders in hand of RM1.3bn, of which ~90% are for power cables, providing earnings visibility for up to a year. During TNB’s most recent analyst briefing, the management highlighted the signing of 5 Electricity Supply Agreements (ESAs) for DC projects with 666MW of maximum capacity in 1QFY25 alone, and expects another 10 such ESAs for DC projects (averaging 150MW-200MW capacity each) to be signed by year-end. This highlights the resilient demand for MV and HV power cables and wires over the near to medium term, as these are key components used in connectivity systems supporting TNB’s ongoing grid upgrade projects and expanding power infrastructure, particularly for data centre developments. We believe SCGB is well-positioned to capture this additional demand, particularly in the MV and HV segments, where only a few sizable players remain.

 

Earnings revision. Following SCGB’s strong quarterly performance, we have revised our earnings forecasts upward by 21.9%/20.7%/17.3% for FY25F-FY27F, respectively. The revision is mainly attributable to higher margin assumptions for power cables, driven by a favourable product mix, particularly within the MV and HV segments. The upward revision also captures the accelerated demand for MV and HV power cables, driven by national grid upgrades and ongoing power infrastructure development. We have also updated our FY24 figures in line with the latest annual report.

 

Valuation & Recommendation. Following the earnings revision, we lift our TP to RM1.72 (from RM1.42), based on an unchanged 15x PE multiple on fully diluted EPS of 11.5 sen, along with an assigned three-star ESG rating. Reiterate BUY. The stock is currently trading at a compelling 12.0x FY25F EPS, translating into a PEG ratio of just 0.16x, which underscores its undemanding valuation relative to its robust earnings growth potential. We continue to like SCGB 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.

 

Risks. Policy Risks. Inability to secure new contracts. Spike in raw material costs such as copper and steel.

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