Southern Cable Group Berhad (SCG) has emerged as a thriving player in this evergreen market, with an unyielding need for power and cables, poised for continuous expansion, according to RHB Investment Bank (RHB IB).
In its Malaysia Trading Idea note, the research house said Malaysia’s ambitious goal of achieving net zero emissions by 2050 – including higher uptake of renewable energy (RE) sources and the enhancing of the country’s grid, is expected to be a catalyst for the group’s earnings growth.
RHB IB keeps SCG’s fair value (FV) of MYR0.50, derived from 15x FY24F P/E, saying that this is a huge discount to its international peer average for the cables and wires business, given SCG’s smaller market cap, local-centric business, and lower margins.
“However, we note that it is one of the sector’s cost leaders and possesses the wide strange of product offerings locally. It also enjoys the lion’s share of demand for cables from TNB,” it said.
“With National Energy Transition Roadmap (NETR), solar photovoltaic (PV) capacity is expected to chart a 14% CAGR to 57GW by 2050 – a boon to the exponential growth in demand for SCG’s certified solar PV cables, which are now widely used by major solar EPCC players.
The Economy Ministry has announced the details of NETR Phase 2 last August.
RHB IB said Tenaga Nasional Berhad (TNB) is upgrading Malaysia’s power grid to accommodate the increasing integration of RE and growing energy consumption, with efforts such as deploying cutting-edge technology like energy storage systems, smart grids, and transmission line enhancements.
“NETR estimated that a MYR420bn investment (c.MYR15.6bn pa) will be needed for grid upgrades over 2023-2050, in line with TNB’s guided MYR90 billion capex for 2025-2030.
“Its contracts account for more than 30% of SCG’s revenue, so the group stands to gain significantly from these upgrades. This is also due to its strong and longstanding partnership with TNB and its reputation for delivering high-quality products.”
However, Kenanga said in previous years, when commodity prices surged, SCG’s margins contracted due to its inability to pass on costs of materials like polymer (c.20% of total costs) to long-term clients.
“However, the lower input prices and higher ASP factored into the new contracts should aid the group’s margins recovery and fuel earnings growth.”
To date, SCG’s orderbook is worth more than MYR1 billion (1.14x cover ratio), providing earnings visibility for the next three years, and it recently secured MYR332.1 million contract from TNB for the supply of underground cables and conductors brings its YTD contract wins to more than MYR500 million, it said.
“On the back of a solid orderbook and Malaysia’s shift towards using RE, the power grid upgrades, and SCG’s growing export sales and recovering margins, we expect it to record a FY22-25F earnings CAGR of 24.3%,” RHB IB added.
Among the key downside risks it include is SCG’s dependence on capex spending by the power industry, escalation of input costs, fluctuation incommodity prices, and margin pressure due to competition.
