PP 7767/09/2010(025354)

Malaysia RHB Research

Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

New Listing 17 May 2010

MARKET DATELINE

Sarawak Cable Offer Price : RM0.70

Fair Value : RM0.99

Public Issue Of 13.0m New Shares, And Offer For Sale Of
19.0m Shares

Table 1: Investment Statistics Bloomberg: 992962Z MK

Pre-tax Net EPS
FYE Turnover Profit Profit EPS Growth PER P/NTA ROE Gearing GDY
Dec (RMm) (RMm) (RMm) (sen) (%) (x) (x) (%) (x) (%)
2009 89.8 10.5 8.1 6.7 (8.2) 14.8 1.4 9.6 Net Cash -
2010f 107.8 12.8 9.9 8.2 22.4 12.0 1.3 11.7 Net Cash 2.5
2011f 123.9 14.3 10.9 9.1 11.0 10.9 1.2 12.0 Net Cash 2.5
2012f 142.5 16.5 12.6 10.5 15.4 9.4 1.1 12.8 Net Cash 2.5
Valuations based on estimated fair value of RM0.99/share
Issued capital (m shares) 120.0 (RM0.50 par) Market capitalisation (RMm) 118.8

X Background. Sarawak Cable Berhad (SCB) is a holding company whose

LISTING DETAILS
wholly-owned subsidiary, Universal Cable (Sarawak) is mainly involved in the
Listing Sought : Bursa Malaysia
manufacture of power cables and wires. SCB was incorporated in 1998 and
Main Market
purchased the entire equity interest in Universal Cable (Sarawak) in 2008.
Universal Cable (Sarawak) commenced operations in 1980 as a trader of Listing Date : 25 May 2010
power cables and wires.
Public Issue : 13m new shares
including:
X FY09-12 Revenue CAGR of 16.6%. We estimate 16.6% revenue CAGR for
- 6.0m to
FY09-12 driven by increasing demand in East Malaysia for power cables and Malaysian public
wires due to: 1) Sarawak Corridor of Renewable Energy (SCORE); and 2) - 7.0m to
upgrading of Sabah’s energy infrastructure. employees
Offer For Sale : 19m existing
shares by way of
X Total power cables solutions provider. SCB is able to manufacture
private
different types of cables ranging from high-voltage bare conductors and low- placement to
voltage power cables to wires used within end-user premises. SCB also bumiputera
sources other types of cables such as high-voltage single core power cables investors
and high-voltage multicore power cables from third party suppliers, thus
having a comprehensive range of products to offer to its customers. MAJOR SHAREHOLDERS

Leader Universal
X Main power cable manufacturer in Sarawak. SCB is one of only two Holdings……………………………………25%
manufacturers of power cables and wires in Sarawak, the other being the Dato’ Sri Mahmud Abu

smaller Sasa Cables Sdn Bhd. For FY09, the total market for the power Bekir…………………………………………24%

cables and wires industry in Malaysia was at RM1.4bn. East Malaysia Sarawak Energy………………………24%
Central Paragon S/B……………… 21%
accounted for RM271.6m or 19.4% of the total, while SCB’s revenue of
RM89.8m accounted for 33.1% of the power cables market in East Malaysia.

X Risks. 1) Delay in rollout of SCORE projects; 2) Higher raw materials costs.

X Forecasts. We base our forecast on a revenue growth of 20% p.a. for FY10
and 15% p.a. in FY11-12. We also maintain a high 17% p.a. gross margin
for FY10-12, due to better product mix.

X Valuations. We estimate a fair value of RM0.99/share after applying a

target of 12x PER to our FY10 EPS of 8.2 sen in line with our target PER for Yap Huey Chiang
the manufacturing sector. The fair value represents an upside of 41% to the (603) 92802641
IPO offer price of RM0.70. We note that HSL, which is a direct beneficiary of yap.huey.chiang@rhb.com.my
SCORE is also valued at a PER of 12x.
Please read important disclosures at the end of this report.

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 17 May 2010

BUSINESS BACKGROUND

X Background. Sarawak Cable Berhad (SCB) is a holding company whose wholly-owned subsidiary, Universal
Cable (Sarawak) is mainly involved in the manufacture of power cables and wires. SCB was incorporated in
1998 and purchased the entire equity interest in Universal Cable (Sarawak) in 2008. Universal Cable
(Sarawak) commenced operations in 1980 as a trader of power cables and wires. It ventured into the
manufacturing of power cables in 1982 as part of its business expansion. SCB currently has two facilities, a
head office in Kuching and a branch office in Kota Kinabalu.

X Core business. SCB’s core business is the manufacture of power cables and wires which accounts for 89.2%
of total revenue for FY09. The company manufactures low-voltage power cables and high-voltage bare
conductors, with a total production capacity of 9,233 tonnes in 2009. SCB is also involved in the trading of
power cables and wires, primarily to supplement its in-house manufactured products. For FY09, SCB’s trading
activities contributed 10.8% of total revenue. Besides manufacturing and trading, SCB also undertakes
turnkey projects for the supply, installation, and commissioning of power cables. The projects are small and
lumpy in terms of revenue contribution (FY08: 0.84% ; FY09: 0%) and has been awarded by only one
customer so far, which is SESCO, Sarawak’s state electricity utility and a wholly-owned subsidiary of its major
shareholder, Sarawak Energy. However, we believe SCB will be awarded more projects in the near future as
the Sarawak Corridor of Renewable Energy (SCORE) gains momentum.

X Total power cables solutions provider. SCB is able to manufacture different types of cables ranging from
high-voltage bare conductors and low-voltage power cables to wires used within end-user premises. SCB also
sources other types of cables from third party suppliers, thus having a comprehensive range of products to
offer its customers. SCB also undertakes the supply, installation and commissioning of power cables. We
opine that the integrated approach gives SCB a competitive advantage as it provides an end-to-end total
solution for power cables.

X Main power cable manufacturer in Sarawak. SCB is one of only two major manufacturers of power
cables and wires in Sarawak, the smaller one being Sasa Cables Sdn Bhd. For FY09, the total market for the
power cables and wires industry in Malaysia was RM1.4bn. East Malaysia accounted for RM271.6m or 19.4%
of the total, and SCB’s revenue of RM89.8m accounted for 33.1% of the power cables market in East
Malaysia. We believe SCB’s leading position in Sarawak provides it with advantages in terms of economies of
scale and proximity to its customers in East Malaysia.

X Synergistic shareholders. Sarawak Energy, one of SCB’s substantial shareholders, is a state-owned

electricity utility holding company. Sarawak Energy’s subsidiaries SESCO and Sarwaja Timur are responsible
for the purchase and commissioning of power cables, thus providing a synergistic relationship for SCB.
Combined revenues from these two customers account for 7.6% of SCB’s FY09 total revenue. Another
substantial shareholder is Leader Universal, a manufacturer of a wide range of power cables and wires. It
serves as a ready source of supply to complement SCB’s product range. Dato’ Sri Mahmud Abu Bekir Taib,
the Sarawak Chief Minister’s son, is the biggest shareholder of SCB, with direct shareholdings (post IPO) of
21% and indirect shareholding through Central Paragon Sdn Bhd (Dato’ Sri Mahmud owns 52.5% of Central
Paragon) which in turn owns 14% of SCB.

X Dividends. Management guided that SCB will be paying a minimum dividend of 2.5 sen per share (interim
tax-exempt) unless: 1) it is in a loss position; 2) it has insufficient cashflow and; 3) it requires further capital
for business expansion. The 2.5 sen dividend translates to a payout of 30%, and a yield of 2.5% based on
our FY10 EPS of 8.2 sen and fair value of RM0.99. We believe that for the next few years, SCB will likely
maintain a payout of 2.5 sen p.a. dividend as it will need to retain more cash for working capital.

BUSINESS OUTLOOK

X FY09-12 Revenue CAGR of 16.6%. We estimate 16.6% revenue CAGR driven by increasing demand in
East Malaysia for power cables and wires due to:

1. Sarawak Corridor of Renewable Energy (SCORE). SCORE is a state government development project
that involves the building of 12 hydroelectric power generation dams to provide power for East and West
Malaysia, among other developments. We view SCORE as the main revenue growth driver for SCB, as: 1)
5 hydro dams are already planned to be built by 2015 through Sarawak Energy at a total cost of RM13bn;
2) SCB is the biggest supplier of power cables in East Malaysia; and 3) SCB has the advantage of being a

SARAWAK 2 CABLE

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 17 May 2010

total power cable solutions provider. We believe SCB will enjoy strong revenue growth for FY10-12 as
SCORE projects gain momentum. We note that SCB is already actively involved in SCORE as it was part of
the consortium which successfully bid for the Bakun-Similajau overhead transmission line project and was
awarded with a RM46m contract to supply, manufacture and deliver high-voltage bare conductors for
FY09.

2. Upgrading of Sabah’s energy infrastructure. Over the next 2-6 years, various power related
developments are being planned for Sabah to increase electricity coverage to 95% by end of 2012
(currently 77%). Projects include Powertron II, an open-cycle gas turbine power plant and SPR Energy,
set for completion in 2010 and 2012/13 respectively. These projects will drive demand for power cables,
which will be positive for SCB.

X Future plans. SCB plans to further grow their revenue base and net profit through :

1. Capacity expansion. SCB plans to increase its production capacity through the purchase of three
additional machinery and equipment. One of the machines has already been ordered and is expected to
arrive in June. The new machines are expected to increase SCB’s production capacity by 46.8% from
8,829 tonnes to 12,963 tonnes and will be utilised for the manufacture of two new products. Funding for
the capacity expansion machines will come from the IPO proceeds of approximately RM3.5m. The
installation and commissioning of all three machines will be completed by 2011.

2. New products. The group plans to introduce two more products, specifically low-voltage aerial bundled
cables used for overhead transmission and low-voltage 2 core twin twisted cables used as a service line
for power supply in rural areas. We believe the expansion and introduction of new products indicates that
management is expecting a significant increase in demand for its products underpinned by SCORE
projects.

3. Investment in new subsidiary companies. SCB intends to utilise RM2m from its IPO proceeds to
invest in two new subsidiary companies for the purpose of reducing production costs and increasing value
added services. SCB plans to utilise RM1m to fund the subscription of 51% equity interest in the new
subsidiary whose principal activity is the manufacture and supply of aluminium rods. Likewise, it will also
spend RM1m to fund the acquisition of 100% equity interest in a company whose principal activity is the
provision of construction, installation and commissioning of cables and wires services. We opine that
through these new subsidiaries, SCB will be able to reduce its raw materials costs and also engage in
more value-added turnkey projects.

X Risks. We believe SCB’s earnings are subject to these risks:

1. Delay in rollout of SCORE projects. As with other Government projects, the success of SCORE relies
on: 1) Funding from the Federal Government; and 2) FDI from overseas companies, such as Rio Tinto and
State Grid Corporation of China which have proposed to invest in aluminium smelters and power projects.

2. Raw material costs. The group relies heavily on the supply of copper rods and aluminium rods. For
FY09, the purchase of aluminium and copper rods for its manufacturing operations accounts for 68.34% of
total purchases. We understand that the company does not hedge its raw materials cost. However, SCB
practices a careful purchasing strategy through management of inventory levels to avoid supply shortages
and unfavorable price movements. We note that SCB is able to pass on any price fluctuations to
customers.

Table 2. Utilisation Of Proceeds From The Public Issue

RMm

Purchase of machinery and equipment 3.5

Investment in 2 new subsidiary companies 2.0

Additional investment in subsidiary company 0.8

Working capital 0.7

Listing expenses 2.1

Total 9.1
Source: IPO Prospectus

SARAWAK 3 CABLE

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 17 May 2010

FORECASTS AND VALUATIONS

X Forecasts. We have assumed revenue growth of 20% p.a. for FY10 and 15% p.a. in FY11-12 given: 1) a low
revenue base in FY09; 2) Increase in production capacity; and 3) SCORE. We also assume 17% gross margin
for FY10-12, due to better product mix as we believe demand for its high-margin high power cables will
contribute more in terms of revenue.

X Valuations. We have derived a fair value of RM0.99/share after applying an FY10 target of 12x PER, in line
with our manufacturing sector target PER. The fair value represents an upside of 41% to the IPO offer price of
RM0.70. We note that HSL, which is a direct beneficiary of SCORE is also valued at a PER of 12x.

Table 3. Forecast and valuations

FYE Dec (RMm) 2009 2010F 2011F 2012F
Revenue 89.8 107.8 123.9 142.5
Growth (%) -33.8 20.0 15.0 15.0

Gross Profit 15.3 18.3 21.1 24.2

Gross margin (%) 17.1 17.0 17.0 17.0

Operating Profit 10.7 13.0 14.6 17.0

Operating margin (%) 11.9 12.1 11.8 11.9

Interest Expense -0.2 -0.3 -0.3 -0.5

PBT 10.5 12.8 14.3 16.5

Tax -2.4 -2.9 -3.4 -3.9
Effective tax rate (%) -22.6 -22.7 -23.5 -23.6

Net Profit 8.1 9.9 10.9 12.6

Source : Company data and RHBRI estimates

SARAWAK 4 CABLE

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 17 May 2010

IMPORTANT DISCLOSURES
This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment
Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by
applicable law. The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change
without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different
assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does
not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any
claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and
objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors
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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15%
or more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are
willing to take on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12
months.

Industry/Sector Ratings
Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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recommended securities, subject to the duties of confidentiality, will be made available upon request.

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for the actions of third parties in this respect.

SARAWAK 5 CABLE

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 17 May 2010

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MALAYSIA
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Jalan Tun Razak
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50786 Kuala Lumpur, Malaysia
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Director

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Additional information on recommended securities, subject to the duties of confidentiality, will be made available upon
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