By Khairie Hisyam
Dominating the Sarawak market, Sarawak Cable has strong political connections in the state. But can that be grown into dominance in the overall Malaysian wires and cables market? Another question that looms is whether its political connections will endure past the current Sarawak Chief Minister.
Business model: In operations since 1980 and having opened its first factory in Bintawa in 1982, the company’s business activities are straightforward: it manufactures two types of cables — single- and multi-core power cables and wires as well as high-voltage bare conductors. In addition it is also among the leading steel fabricators in the state of Sarawak.
However the single biggest contributor to company revenue is its contract works segment, which involves the supply, installation and commissioning of transmission line projects. As of the first quarter ended March 31, 2014 (1Q14), the segment makes up 68% of turnover, growing from 58% in the corresponding period last quarter.
In comparison, cable manufacturing and sales contribute 23% to company revenue while steel fabrication brings in the remaining 9% as of 1Q14.
That said, its manufacturing segment made up 92% of the group’s profits in 2013 while only 8% of profits came from the contracts segment, according to Sarawak Cable’s 2013 annual report.
Shareholders and management: Sarawak Cable chairman Mahmud Abu Bekir Taib, eldest son of Sarawak former chief minister and current Yang Di-Pertua Negeri Abdul Taib Mahmud, is the biggest shareholder with a direct holding of 20.69% as of the 2013 annual report. In addition he has another 12.23% in indirect interest through Central Paragon Sdn Bhd,
The next biggest shareholder is Sarawak state government’s wholly owned integrated energy utility Sarawak Energy Berhad with 18.75% while Central Paragon Sdn Bhd is the only other substantial direct shareholder.
Professional management comes in the form of Toh Chee Ching, who is the sole executive member of the board as well as current group managing director and chief executive officer.
Toh, 52, was appointed as Universal Cable (Sarawak) Sdn Bhd’s managing director in 2009 after nine years with the company in various senior roles. Prior to that, his career in the finance and financial advisory sector included stints at Tien Ren Securities in Taiwan, Hock Hua Bank Bhd (now part of Public Bank Bhd) and Sarawak Securities Sdn Bhd (now K&N Kenanga Holdings Bhd).
Share performance: Over the past year, the stock had moved relatively sideways. On Aug 7, 2013, the counter closed at RM1.61 per share compared to RM1.51 per share on yesterday’s closing bell, Aug 7, 2014.
In the intervening 12-month period, however, the stock hit an all-time high of RM1.85 per share by mid-August 2013 before hitting a year’s low of RM1.39 in early June this year.
Additionally, prior to this one-year timeframe the counter had recovered from a multiple-year low of RM1.01 in late February 2013, around the same time the company posted a sharp 58.8% dip in full-year net profits for FY12 likely due to a 60% decline in operating profit for its steel fabrication segment at the time.
What analysts think: In a report early last month, AmResearch maintained a hold rating pending a clearer picture on Sarawak Cable’s proposed acquisition of Universal Cable (M) Sdn Bhd and Leader Cable Industry Bhd — both units of Leader Universal Holdings Bhd — for RM210mil from HNG Capital Sdn Bhd.
Previously listed on Bursa Malaysia, Leader Universal Holdings was taken private in a deal worth RM480.1 million two years ago. Notably HNG Capital is controlled by the family of businessman H’ng Bok San, a Sarawak Cable board member.
If the deal goes through, Sarawak Cable would become the single largest integrated transmission cable player in Malaysia along with being among the region’s biggest 500kV cable producers, said AmResearch, adding that with improved economies of scale that follow, the company would be in a better position to compete for more transmission jobs in West Malaysia.
More recently, Sarawak Cable’s unit was awarded a RM14.7 million “132kV single circuit loop in/out PMU 132/33kV Enstek from KLIA-Salak Tinggi” transmission project by Tenaga Nasional Berhad (TNB). While small, AmResearch feels this project is an encouraging sign for the company’s push into West Malaysia.
Without taking consideration the potential acquisition, AmResearch’s fair value target for the company is RM1.70 per share. The research house has placed the counter and forecast numbers under review pending confirmation of the acquisition, which is currently at due diligence stage.
Earnings forecast: Based on current numbers, AmResearch expects revenue to jump sharply this year, more than doubling to RM551 million from RM208 million posted in FY13. Similarly core net profit is forecast to nearly quadruple to RM27.3 million from RM7.5 million last year.
This year, contributions from the company’s 500kV backbone line works in Sarawak, with transmission packages worth RM620 million, are expected to come in from 2Q14 onwards. AmResearch places the company’s current orderbook at RM756 milion.
In terms of dividend yields, the research house expects an improvement from 1% in FY13 to 1.9% in FY14 onwards.
StockStalk: The wires and cables industry is traditionally thin on margins, which means investors may not be able to expect spectacular profit jumps down the road. That said, however, Sarawak Cable is an interesting possibility to consider for those inclined to put their money in this sector.
Primarily strong in Sarawak, any discussion on Sarawak Cable is remiss without considering the fast-developing Sarawak Corridor of Renewable Energy (SCORE).
Rapid infrastructural and industrial growth leads to an urgent need to expand and improve power generation and distribution capabilities, which in turn means more power cables, conductors and transmission lines — the company’s products. This means the ongoing progress of SCORE is encouraging for Sarawak Cable given its political connections.
It is worth noting that in addition to former chief minister Abdul Taib Mahmud’s son Mahmud Abu Bekir as chairman of Sarawak Cable, the chairman of Sarawak Energy, Abdul Hamed Sepawi, is Abdul Taib’s cousin.
Furthermore the transition to a new chief minister for the state earlier this year had seen overall policy continuity and this means business as usual for the various public-listed companies linked to former chief minister Abdul Taib Mahmud’s family — Sarawak Cable included.
However it is also important to look beyond Sarawak’s shores. Sarawak Cable has been seeking to gain more market share in Peninsular Malaysia and its proposed acquisition of Leader Universal Holdings’ units — market leaders in West Malaysia — would be a massive strategic boost to its pursuit of a stronger position in the Malaysian market.
Such an acquisition would add to its capacity tremendously as the units have five factories among them, located in Negeri Sembilan, Johor and Kedah. Sarawak Cable’s factories in comparison are primarily in Kuching. Should the deal go through, Sarawak Cable’s nationwide market share would hit 50%, according to AmResearch, strategically poised on both sides of the South China Sea.
Looking further beyond, Sarawak Cable’s prospects look promising if it can stay competitive on East and West Malaysia as the demand for more cables — a major net profit contributor — is only limited by the pace of infrastructure growth to meet ever-growing demand for electricity supply as population increases.
The big question now is whether the deal, which will involve a cash payment, assumption of liabilities and the issuance of new Sarawak Cable ordinary shares, will go through. That said, the selling owner is ultimately Sarawak Cable board member and industry veteran H’ng Bok San’s family, which controls HNG Capital. While he would naturally abstain from all considerations on the deal, it is hard to see the deal not going through.
Another question to ponder is how long Sarawak’s policy continuity will be in place given Abdul Taib’s successor, Adenan Satem, turned 70 this year, and how a possible discontinuity down the road may affect Abdul Taib-linked companies — Sarawak Cable included.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KiniBiz makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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