Results

• SCable reported 3QFY16 results with revenue of RM313.9m (-9% QoQ, -18% YoY) and earnings of RM7.2m (+47% QoQ, +55% YoY).

• The earnings improvement both QoQ and YoY was driven by margin recovery from both the cable and construction divisions.

• Nonetheless, cumulative 9M earnings which summed to RM15.8m was still down -44% YoY.

Deviation

• 9M earnings made up 44% of our full year forecast (59% of consensus) which is below expectations.

Dividends

• None declared.

Highlights

• Recovery for cables... Despite slight QoQ revenue growth (+5%), the cable division saw PBT recovering by +68%. PBT margins expanded QoQ from 3.2% to 5.1% as newly priced orders from Tenaga have started contributing.

• ...and construction. While construction PBT margins doubled QoQ from 3.4% to 7%, this was partially offset by a -39% revenue decline. The latter factor highlights our concerns on SCable’s dwindling orderbook balance. We estimate SCable’s construction orderbook to stand at RM639m. SCable’s orderbook cover has contracted from 8.1x a year ago to a mere 1.1x currently as a result of aggressive burn rate coupled with lacklustre job wins.

• Baleh Dam revival. In Sept, Sarawak Energy received the approval from the State Government to proceed with the construction of the Baleh Dam (1,285MW). With this job kicking off, SCable could be a potential beneficiary via the transmission line contracts. To recap, SCable previously undertook the 500kV transmission line job from Mapai Lachau-Todong in Sarawak. Sarawak Energy is the 2nd largest shareholder in SCable with a 16.5% stake.

Risks

• Net gearing continues to climb to 211%, up from 170% in 2Q and 127% in 1Q.

Forecasts

• Our previous forecast is unchanged but should no longer be used as a reference as we are ceasing coverage on the stock.

Rating

Ceasing coverage

• While SCable’s earnings are recovering, its magnitude is far less than what management had guided for. Coupled with its extremely high net gearing, we see little investment appeal in the stock at this juncture. As such, we are ceasing coverage on SCable.

Valuation

• Our previous TP of RM1.30 was based on the SOP method which implied FY16-17 P/E of 13.6x and 10.2x.

Source: Hong Leong Investment Bank Research - 25 Nov 2016