Acquisitions provide SCable better economies of scale

by **Cals** Wed 09 Jul 2014, 08:50

Business & Markets 2014

Written by AmResearch

Tuesday, 08 July 2014 10:06

Sarawak Cable Bhd
(July 7, RM1.56)
Maintain hold with target price of RM1.70 (under review): We continue to place SCable’s target price of RM1.70 under review pending official confirmation of details of its proposed acquisitions from HNG Capital Sdn Bhd.

The Edge weekly reported over the weekend that the group intends to issue up to 10% of new shares to fund the acquisition of Universal Cable (M) Sdn Bhd (UCMB) and Leader Cable Industry Bhd (LCIB).

Group managing director Aaron Toh told the weekly that it intends to borrow RM110 million to fund the acquisitions, while the remaining RM60 million will be offset by debts owed by HGN Capital to UMCB and LCIB.

At its closing price of RM1.59 on July 4, we estimate that a total of 25 million shares (9% of current shares outstanding) worth RM40 million could be issued.

Toh said the acquisitions would make it the single largest integrated transmission cable player in Malaysia and one of the region’s biggest producers of 500kV cables. SCable will also be the only producer of 275kV underground cables in the Asean region.

Toh said the acquisitions will give SCable better economies of scale and help it penetrate the Indonesian market where demand for cables is still strong.

UCMB has three factories in Nilai, Negeri Sembilan and one in Johor, while LCIB has one in Kedah. We expect SCable’s market share in Malaysia to grow to 50% with the acquisitions.

Recall that HNG Capital will guarantee a total profit before tax of RM21 million at the two companies for financial year 2014 ending Dec 31 (FY14F). Any shortfall will be paid by HNG Capital. We understand that margins for the two companies could be lower than SCable’s current cable business but there are plans to improve it post-acquisition.

We think that the acquisitions will allow SCable to tap the Peninsular Malaysia market where existing lines will have to be upgraded to prevent transmission loss. Tenaga Nasional Bhd is expected to spend between RM1 billion and RM2 billion annually to upgrade its existing lines.

We expect contributions from the 500kV backbone line (transmission package worth RM620 million) to flow through from the second quarter onwards. SCable’s current order book stands at RM756 million.

We maintain our numbers for now as SCable is still conducting due diligence on the proposed acquisitions. We expect a decision in the third quarter. We place SCable under review pending the firming up of acquisition details. — AmResearch, July 7

[You must be registered and logged in to see this image.]

[size]

This article first appeared in The Edge Financial Daily, on July 8, 2014.[/size]