Southern Cable Group Bhd - Factory @ Kedah (Oct 2024)

Apex Securities said it came away optimistic after the briefing by Southern Cable post its 4QFY24 results. Key takeaways include record-high earnings in FY24 where the group achieved its highest-ever core net profit of RM72.3 million with a CNP margin of 5.4%.

This was driven by a surge in orders for MV and HV power cables and wires, attributed to rapid substation development for solar farms, data centres, and fast-tracked projects under Tenaga's Green Lane Pathway. Moving forward, management expects CNP margins to hover at 4QFY24 levels of 7.5%, underpinned by (i) a better product mix, with c.40% of orders comprising MV, (ii) 3,000 km of newly added capacity, and (iii) sustained momentum in US exports for aluminum-based cables and wires. As of Dec 2024, total orders on hand stood at RM1.28bn, equivalent to 1.0x FY24 revenue, with 58% from long-term order books and 42% from POs.

SCG's export market especially to the US remained robust, with FY24 sales of c.RM40m, nearly tripling from RM14m in FY23. Monthly container shipments have remained steady at 35–40 containers. For FY25, management is targeting RM100m in US sales, backed by expanded product offerings and capacity allocation. Two new aluminum cable products are currently pending UL Solutions certification, expected to get certified by 3QFY25, which will further widen SCG's addressable market. With Mexico, Canada, and the EU no longer exempt from US tariffs, the house believes SCG's fully compliant products will become a more competitive option for US distributors seeking cost-effective alternatives.

As of FY24, SCG's total production capacity reached 46,980 km/year, operating at 86% utilisation. To address rising demand, 3,000 km of additional capacity was added YTD, with another 2,000 km set to be added in 2H25, bringing total capacity to 51,980 km/year by end-FY25. The expansion primarily targets LV and MV segments, supporting national grid upgrades and export market growth, particularly in the US.

The house expects power cable demand to remain strong, driven by national grid upgrades, renewable energy projects, construction upcycle, data center booming, and growing US demand. Apex was informed that Tenaga's 1+1 tender has been fully awarded, with SCG securing c.20% market share, consistent with previous cycles. Considering Sarawak Cable's liquidation and Leader Cable being up for sale, the house said it believes SCG is well-positioned to capture any supply gap, especially if these competitors face cash flow constraints that hinder order fulfilment. This could translate into additional upside surprise orders for SCG, particularly in the MV segment, where few sizeable players remain in the field. On top of that, SCG's 1,800 sqm HV Milliken cables are expected to receive TNB certification by 3QFY25. However, given the specialised nature of these
high-specification conductors, Apex expects sales conversion may take time to materialise, with meaningful revenue contribution likely to commence from FY26 onwards.

Earnings revision. Maintained.
Apex maintains its BUY recommendation with an unchanged target price of RM1.71, applied to an 18.0x P/E based on FY26 fully diluted EPS of 9.5 sen, along with an assigned three-star ESG rating. The house continues to like SCG for its role as a proxy for Malaysia's growing power demand,  increasing demand for HV power cables, and position as one of the few vendors supplying US distributors.

Risk. Heavy reliance on government initiatives. Inability to secure new contracts. Spike in raw material costs such as copper and steel.