Short-term hiccups for Sarawak Cable

by **Cals** Fri 22 Nov 2013, 14:11

Business & Markets 2013

Written by AmResearch

Friday, 22 November 2013 10:05

Sarawak Cable Bhd
(Nov 21, RM1.57)
Maintain buy at RM1.57 with a fair value of RM2.33: We maintain “buy” on Sarawak Cable Bhd with a sum-of-parts-derived fair value of RM2.33 per share.

We tweak our FY13 earnings downwards following the lower than expected results for the nine months ended Sept 30 of 2013 financial year (9MFY13), which were announced on Nov 20. But we increase our FY14 and FY15 numbers by 2% and 6% to reflect higher recognition from the 500kV backbone power line job in Sarawwak.

Sarawak Cable posted 9MFY13 earnings of RM1.3 million, down by 73% from RM4.9 million a year earlier. This is due mainly to slow recognition of ongoing projects and weaker demand for galvanised steel products during the period.

This was partly offset by improved margins and better cost management for its power cable and conductor segment, which saw earnings before interest and tax (Ebit) margins improving to 7% from 2% a year earlier.

However, there was also an exceptional loss of RM500,000 during 3QFY13 due to the amortisation of intangible assets. Adding the amortisation of RM1.9 million in the preceding quarter, 9MFY13 core earnings would be at RM3.8 million.

The amortisation is related to projects with contract revenue that were acquired following its acquisition of Trenergy Infrastructure Sdn Bhd that was completed last year. Nevertheless, management guided that these should be one-off and should not be recognised further in 4QFY13.

We expect 4Q earnings to improve as Sarawak Cable would begin recognising revenue from its 500kv backbone line job worth RM620 million. Work on this commenced last week.

According to channel checks, Sarawak Cable is expected to secure more transmission jobs in Sarawak. Other potential jobs in the mid-term include the Tanjung Manis-Bintulu and Mambong-Kalimantan lines worth about RM400 million.

During our recent visit to Sarawak, we learned that the feasibility study on the Baram (1,200mw) and Balleh (1,300mw) dam projects is currently in its final stage while the Balingan coal-fired plant (600mw) project is expected to be awarded by year-end. Sarawak Cable will be the main contender to link the new plants to the power grid.

We also understand that there are plans for a second phase of the 500kV line, and another two 275kV lines to link up the various growth nodes within the Sarawak Corridor of Renewable Energy (Score).

Despite the short-term hiccups, we continue to like Sarawak Cable as it is the only integrated power cable and transmission player in the state that will play a crucial role in powering up Score and Sarawak. Maintain “buy”. — AmResearch, Nov 21

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This article first appeared in The Edge Financial Daily, on November 22, 2013.