Southern Cable: Bright Prospects Supported by Order Book Expansion

Southern Cable’s future outlook remains robust, driven by strong demand from data center expansions, Malaysia’s National Energy Transition Roadmap (NETR) initiative, and industrial building development. The Group’s total orders on hand stood at RM699.3m as of September 2024, with a tender book valued at ~RM700m, reflecting healthy pipeline activity.

Southern Cable: Improved Margins and Revenue Growth

SCG achieved a gross profit margin of 9.9% in 3QFY24, a 3.4% increase, supported by favorable product mix in the power segment. Mid-voltage (MV) products now make up 45% of the order book, driven by higher demand from new data centers and industrial developments. The company also benefited from growing exports of aluminum cables and wires to the U.S.

U.S. Market Expansion

SCG’s exports to the U.S. are gaining traction, with shipments growing from 45 containers per month in 3QFY24 to an expected 50 containers per month by 1QFY25. The company aims to double shipments to 100 containers per month within two years by expanding product offerings and leveraging its competitive pricing. This aligns with ongoing U.S.-China trade tensions, offering SCG a competitive edge.

Capacity Expansion Plans

SCG’s current production capacity stands at 46,980km/year, with an 84% utilization rate. To meet growing demand, the company is investing in a 5,000km/year production line expansion, expected to come online by CY25. Additionally, SCG has allocated ~RM30m to build new facilities on a 13.3-acre site, increasing aluminum cable and wire capacity by 20–30%. This new production is set to roll out in CY26, primarily targeting the U.S. market.

Strategic Positioning in the Market

SCG is poised to benefit from shifting supply-demand dynamics in the cable and wires market, particularly in the MV and high-voltage (HV) segments. The company has an operational edge with four continuous catenary vulcanization (CCV) lines, compared to the typical two lines used by competitors. SCG is awaiting approvals for its HV Milliken cable, which will further strengthen its position in the HV market.

Revised Earnings and Valuation

SCG’s earnings forecasts for FY24F/FY25F/FY26F have been raised by 11.7%/12.4%/11.3% to RM68.6m, RM84.8m, and RM102.9m, respectively. The revisions reflect higher margins in power cables and increased replenishment orders (~RM1.5bn from ~RM1.0bn). The target price has been raised from RM1.13 to RM1.27, based on an 18.0x P/E ratio pegged to FY25 EPS of 7.1 sen.

Buy Recommendation Maintained

SCG remains a compelling investment due to its role as a proxy for Malaysia’s rising power demand, expansion into the HV market, and growing presence in the U.S. export market. It also holds a three-star ESG rating.

Risks

Key risks include reliance on the power industry, rising plastic resin costs, and intense market competition.

SCG is well-positioned to capitalize on favorable market conditions, with a strong order book, expanding margins, and growth in both domestic and export markets. Its capacity expansions and strategic initiatives further reinforce its competitive edge in the industry.

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