This article first appeared in The Edge Malaysia Weekly on May 22, 2023 - May 28, 2023

AFTER decades of relying on the domestic market, the US-China trade war presented Southern Cable Group Bhd (SCGB) a unique opportunity to diversify outside the country.

As a result, the manufacturer of copper and aluminium cables and wires, plastic compounds and wooden cable drums has seen its exports to the US increase to almost 5% of the group’s total revenue base, its group general manager Ooi In Keong tells The Edge in a rare interview.

“We are currently supplying five to six containers monthly to the US, and we will gradually increase the volume and revenue over the next few quarters as we expand our product range,” he says.

Ooi points out that since its main raw materials — aluminium and copper — are priced in the US dollar, not only do exports to the US provide a natural hedge against foreign exchange fluctuations, but they also fetch better prices compared with the local market.

“If we were to compare the margins, we can achieve a high single digit [from exports] compared with the local market,” he says without elaborating on the value of the contracts with the US-based distributor.

Hong Leong Investment Bank (HLIB) Research said in a recent note that SCGB’s venture into the US market will be a major earnings driver for the group in its financial year ending Dec 31, 2023. “With the US market commanding better pricing [high single-digit gross profit margin vs normal power cable: 5% to 6%], the contribution will lift SCGB’s group-level margin,” it added.

The research house estimates that RM100 million worth of cable sales from SCGM’s US-based distributor in FY2023 could drive its utilisation rate to 85% or 90%, from 79% in the first nine months of FY2022.

Ooi says cable demand from the domestic public sector remains strong, nonetheless, with the group having a tender book of RM520 million, of which 87% comprises power cable and wire supply contracts and 13% battery system supply contracts for 5G towers.

The Kedah-based cable manufacturer’s order book currently stands at RM692.7 million, which includes RM449.5 million in long-term contracts and RM243.2 million worth of purchase orders from engineering, procurement, construction and commissioning (EPCC) contractors and resellers, among others.

Ooi says that in anticipation of stronger sales at home and abroad, SCGB has allocated RM7.5 million for expansion, which will include the construction of a new plant, known as Lot 28, to ease the bottlenecks in its cable production.

The group will relocate some of its existing machinery to the new plant for smaller cables, while the existing plant will serve high-volume clients such as those in the US. It aims to increase its annual production of cables and wires by more than 20%, from 38,780km to 40,780km, by 2024.

It also plans to grow its annual production of plastic compounds to 12,000 tonnes from 7,800 tonnes currently. This will cost RM4 million, which will be funded by the proceeds from its IPO in 2020 and internal funds. Plastic compounds enhance the insulation quality of cables and wires, as well as reduce costs.

According to HLIB Research, SCGB’s share price is currently trading below its IPO price of 34 sen, at an undemanding FY2023 forward price-earnings ratio (PER) of 11.3 times, which is significantly lower than its global peers’ average of 22.7 times, despite having a stronger compound annual growth rate of 32.3% in terms of its FY2021-FY2024 core net profit. The research house values the stock at 51 sen per share, with a PER of 18 times, based on its forecast FY2023 earnings per share of 2.8 sen.

The counter closed at 30 sen last Thursday, giving the group a market capitalisation of RM240 million.

The lack of investor interest in SCGB could be because 60.9% of its shares are held by managing director Tung Eng Hai, his spouse Ooi Gaik Bee and his family. According to the company’s latest annual report (as at March 31), Tung and his spouse have indirect equity interest of 35.69% via Sino Shield Sdn Bhd while their niece Fawiza Faiz has a 25.13% stake via Semangat Handal Sdn Bhd.

On the share liquidity issue, Ooi — who has been with SCGB for more than 18 years — says now that the group is on a better growth path with the worst of the Covid-19 pandemic behind it, it is ready for and welcomes opportunities from institutional investors.

“This year, our outlook is even brighter [versus 2022]. Also, we are among the top three biggest cable manufacturers in Malaysia. You can see our improvement in performance over the past quarters. We have a strong local presence and we hope investors can recognise our long-term potential,” he adds. 

SCGB’s net profit growth recovered in FY2022, having registered a 33% jump to RM14.5 million from RM10.9 million in FY2021.

Founded in 1993, SCGB has its main operation in Malaysia. It also has an established distribution network across Southeast Asia — including Myanmar, Indonesia and Cambodia — through direct channels and resellers.

On the home front, the group services various industry sectors such as power distribution and transmission, telecommunications, building and construction, infrastructure, manufacturing and processing, including oil and gas processing and petrochemical plants.

It is a registered supplier of cables and wires to Tenaga Nasional Bhd, Sabah Electricity Sdn Bhd, Telekom Malaysia Bhd, Petroliam Nasional Bhd (Petronas) and Sarawak Energy Bhd. Some of its notable projects include the Refinery and Petrochemical Integrated Development (RAPID) in Pengerang, Johor, the MRT Kajang Line (MRT 1) and MRT Putrajaya Line (MRT 2).

The demand for high industry standards in cable production has created a high barrier to entry, with the group’s only comparable peers being Sarawak Cable Bhd and Power Cables Malaysia Sdn Bhd (unlisted). SCGB, Sarawak Cable and Power Cables are the only manufacturers in the country that produce high voltage power cables of up to 132kV.

According to Ooi, manufacturers must obtain accreditations and certifications from Sirim, the Energy Commission and the Fire and Rescue Department. Their exports must comply with International Electrotechnical Commission (IEC) or British standards.

“The process of getting approvals is quite tedious and time-consuming. We have a long-term relationship with customers, with proven product quality and supply level of satisfaction. Cables, once installed, need to last more than 20 years to be as functional as its original performance,” he says.

Nonetheless, the industry does not need to rely on innovation to remain competitive, he adds. What matters is compliance with product specifications as guided by international standards.

“After 30 years, there is nothing new. Today, cables are still quite similar, guided by international specifications, IEC or Malaysian standards. It is unlike other products, such as phones, where you need to innovate every time,” says Ooi.

It is understood that SCGB’s order book, which contributes 20% to 30% to the group’s revenue, is typically long term in nature and is evaluated and adjusted every quarter to reflect the prevailing price of copper and aluminium as well as the performance of the US dollar.

Meanwhile, the remaining 70% to 80% of the group’s revenue is derived from purchase orders secured daily on the open market, which have a delivery time frame of three months.

Ooi says the contract value reflects the daily prevailing price of metals such as copper and aluminium on the London Metal Exchange, the US dollar, as well as the price of non-metal-based materials such as resin and sawn timber.

He expects SCGB to ride on the expansion of the renewable energy sector, adding that 5% of its sales comes from EPCC contractors involved in Large Scale Solar projects.

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