Results

• SCable posted 1QFY16 results with revenue of RM364.5m (+6% YoY, -14% QoQ) and earnings of RM3.6m (-70% YoY, -69% QoQ).

Deviation

• 1Q earnings were significantly below expectations at 7% of our full year forecast (6% of consensus).

• The deviations largely stemmed from losses for the cable division (LBT: -RM3.4m).

Dividends

• None declared.

Highlights

• Order delays lead to losses but… The cable division witnessed a 15% topline decline YoY as orders from Tenaga were delayed. As a result of low plant utilisation, the division suffered losses as production was insufficient to cover overheads.

• …pick up in the coming quarters. Management shared that orders from Tenaga have started flowing since 2Q. It shared that the cable division currently sits on c.RM700m worth of orders to be fulfilled for the remainder of the year. This is almost equivalent to the division’s full year revenue for FY15 (RM761m).

• Hopeful for more contracts. SCable has tendered for over RM1bn in transmission line projects. We understand that parent-co Sarawak Energy will roll out another RM600m in 500kV transmission lines next year. In our view, SCable is in a polar position to secure this job given its track record with the current 500kV line. SCable is also aiming to supply 275kV cables for RAPID (including construction) and 132kV cables for the MRT2 (MRT1 was also supplied by them).

Risks

• High net gearing of 127% (due to acquisitions) is a concern. However, we are positive that this has declined from 163% in 4QFY15.

Forecasts

• We cut FY16-17 earnings by 35% and 30% respectively as we factor the slower than expected orders by Tenaga for its cables and lower margin assumption.

Rating

• Maintain BUY, TP: RM1.92
• Whilst the results were a disappointment, we retain our BUY rating in anticipation of a pickup in earnings over the coming quarters. Its orderbook build up witnessed in 2Q provides some comfort that earnings should eventually rebound.

Valuation

• Following our earnings cut, our SOP based TP is reduced from RM2.49 to RM1.92. This implies 17.1x FY16 P/E but a more palatable 13.3x for FY17 once earnings recover.

Source: Hong Leong Investment Bank Research - 27 May 2016