By THOMAS HUONG
Corporatemilestone:Tung (left) and Ooi. Southern Cable’s IPO entails a public issue of 209.35 million new shares (or 26.17% of the enlarged issued share capital), and offer for saleof 20 million existing shares at an issue price of 34 sen per share.
CABLE and wire manufacturer Southern Cable Group Bhd is optimistic about future sales growth, and sees opportunities in new products it plans to sell.
Founded in 1993, the group based in Baling, Kedah, which is en route for ACE Market listing on Oct 16, sees potential in the supply of cables in Malaysia, as well as Myanmar and Cambodia.
The group is aiming to raise RM71.2mil from its initial public offering (IPO), with RM30mil (or 42.15%) of gross proceeds to be used to build three new factories, improve production efficiency and expand its product range.
“While our main focus will still be in Malaysia, we can look at neighbouring markets for further growth, ” group managing director Tung Eng Hai tells StarBizWeek.Based on the IPO prospectus, for the financial year ended Dec 31,2019, Malaysia accounted for 98.06% of the group’s revenue.
Besides the three factories, RM27.5mil of the IPO proceeds will be working capital, RM9.2mil will be to repay bank borrowings and RM4.5mil to defray listing expenses.
In the pipeline are two new factories near its production plants in Kuala Ketil, Kedah, and new machines and equipment upgrades, that would expand the group’s total production capacity by 9,050km to 40,130km of cables and wires per year by the first half of 2022.
Also being planned is a new polyvinyl chloride (PVC) compound production plant next to its factory in Sungai Petani, Kedah, by the first half of 2022.
This would increase the group’s manufacturing capacity of PVC compound material by 4,200 tonnes to 12,000 tonnes per year.
For 2019, close to 90% of the group’s revenue came from the supply of cables and wires used for power distribution, communications, as well as control and instrumentation applications.
The balance of revenue came from related products and services including sales of aluminium rods, plastic compounds and wooden cable drums; trading of cables and wires, and copper strips, and supply and installation of rectifiers.
The new production facilities and upgrades will allow the group to offer new products such as high voltage power cables and thermal resistant aluminium conductor cables, and industrial cables with synthetic rubber-based sheathing.
“We also plan to offer automotive and elevator cables and wires, to grow our market share.
“The new products will give better margins, and expanding the production facilities will also improve efficiency which leads to better profitability. In certain areas, we will invest in automation for better efficiency and reduce manpower costs, ” says Tung.
Southern Cable is a registered supplier of cables and wires with Tenaga Nasional Bhd (TNB), Telekom Malaysia Bhd (TM), Sabah Electricity Sdn Bhd (SESB) and Petroliam Nasional Berhad (Petronas).
The group’s cables and wires are used in sectors such as power distribution and transmission, telecommunications, building and construction, infrastructure, manufacturing and processing industries including oil and gas processing and petrochemical plants.
The group has supplied cables and wires for the RAPID project in Pengerang, Johor, and Sungai Buloh- Kajang Mass Rapid Transit (MRT1) projects.
Room for further growth
From FY2016 till FY2019, group revenue increased from RM470.7mil to RM656.7mil, reporting a three-year compounded annual growth rate (CAGR) of 11.7%.
Net profit saw a three-year CAGR of 26.4% from RM14.2mil to RM28.5mil, in the same period. The group aims to have a dividend payout policy of a minimum of 15% of its net profit to shareholders.
According to the Industry Overview report by Vital Factor Consulting Sdn Bhd, Southern Cable commands a 6% share of the RM10.3bil market for the manufacture of electric and electronic cables and wires in Malaysia.
“There is plenty of room for us to grow our market share, which we hope to do with our new products and higher production capacities, ” said group general manager Ooi In Keong.
As of Sept 1, the group’s order book is RM405.4mil which will last till 2022.
“We have contract orders with TNB, TM and SESB, ” says Ooi. He has highlighted that the group’s strengths, which include its 27-year track record of supplying cable and wires, various certifications for its products, experienced management team and wide range of products. “We can be a one-stop centre and supply all the cables and wires for a project, ” he says.
Ooi also points out that the group’s production is supported by furnace and casting operations and manufacturing of plastic compounds. The group has two electric furnaces and a gas-fired furnace that melt copper and aluminium respectively, before casting them into rods to be used as core materials and transmitting medium for cables and wires.
Its factories have a combined annual production capacity of 28,050 tonnes of aluminium and copper rods. “These are the main materials for cable manufacturing. We can control the production quality, ” he says.
Regarding the Covid-19 pandemic and movement control order (MCO), Ooi says there had been minimal impact on the group.
“We supply to utility companies. We did not suffer any cancellation of orders.
“In March, we had 11 days of shutdown of factory operations.
“Then we had 31 days of partial operations, and by end-April, we were back to full operations, ” he says.
The group’s promoters and selling shareholders are Sino Shield Sdn Bhd, which holds a 51.73% stake in Southern Cable; Semangat Handal Sdn Bhd (43.35%); while the rest is held by Southern Cable executive director Wong Meng Kee, his wife Tung Cheng Im, and her sister Tung Siew Luan and other individual shareholders.
The shareholders of Sino are Eng Hai, his wife Ooi Gaik Bee and Wong, while those of Semangat are Gaik Bee’s niece Fawiza Faiz and Redzuan Husain.
Upon listing, the promoters will hold in aggregate 70.32% of the enlarged issued share capital of 800 million shares.
Southern Cable’s IPO entails a public issue of 209.35 million new shares (or 26.17% of the enlarged issued share capital), and offer for sale of 20 million existing shares at an issue price of 34 sen per share.
Of the new shares, 40 million shares will be for the Malaysian public, and 22 million shares for eligible directors, employees and persons who have contributed to the group.
A total of 67.3 million shares under the public issue are allocated for private placement to selected investors and the remaining 80 million shares to identified bumiputra investors approved by the International Trade and Industry Ministry (Miti).
Meanwhile, 20 million existing shares will be offered via private placement to selected investors.IPO applications will close on Oct 6 at 5pm. MIDF Amanah Investment Bank Bhd is the principal adviser, sponsor, sole underwriter and placement agent for the IPO.
In a report, MIDF Research says it projects demand to recover in the power sector, on the back of an improved economic backdrop in the next two years.
The research unit has forecast electricity demand to contract by 7.7% in 2020 (reflecting the impact of the Covid-19 pandemic and lockdowns), before recovering by 8% to 116,135 gigawatt hours (GWh) in 2021.
Electricity demand in 2022 is projected to grow further by 3.3% to 119,998GWh.
The research unit’s projections are compared with pre-pandemic average annual electricity demand growth of around 2% per annum. Meanwhile, downside risks to Southern Cable’s financial performance include fluctuations in the prices of copper and aluminium, and foreign exchange fluctuations as 40.47% of purchases of raw materials for 2019 were denominated in US dollars.
Based on the prospectus, due to the business interruptions during the MCO, group revenue dropped 27.3% year-on-year to RM241.1mil. Profit after tax dropped 47.1% to RM9.15mil for the six months ended June 30,2020 (FPE 2020). As at FPE 2020, the group’s net gearing ratio is 0.53 times.
Based on the IPO price of 34 sen and earnings per share (EPS) of 3.57 sen for FY2019, the price-earnings ratio (PER) is 9.52 times.
MIDF Research has assigned a fair value of 40 sen per share for Southern Cable, premised on pegging a PER of 12 times to the group’s forecasted FY2021 EPS of 3.3 sen. The PER is pegged to the five-year historical PER mean of its closest peer, Sarawak Cable Bhd.