This article first appeared in Capital, The Edge Malaysia Weekly on January 8, 2024 - January 14, 2024

ELECTRICITY cable manufacturing may sound like a dull business to the man in the street, but the industry has seen several notable deals recently that have piqued market interest, such as the injection of Central Cables Bhd into listed entity KUB Malaysia Bhd by Plantation and Commodities Minister Datuk Seri Johari Abdul Ghani.

While the profit margin for low voltage (LV) cable products may seem unattractive to some as it ranges from 3% to 5% after tax, mid-to-higher voltage products could potentially fetch a better premium, according to Tee Kok Hwa, CEO of Master Tec Group Bhd, a Melaka-based cable maker that is undertaking a RM111.39 million initial public offering (IPO) on the ACE Market and slated to debut on Jan 29.

Primarily an LV cable manufacturer, Master Tec will be expanding into the medium voltage (MV) market with the funds from its maiden share sale. Its ambition is to eventually tap the high voltage (HV) market, which Tee says is currently dominated by just two players in Malaysia — Lembaga Tabung Angkatan Tentera’s Power Cables Malaysia Sdn Bhd and units of Sarawak Cable Bhd.

“During the Movement Control Order, a few players in MV cable were phased out of the market, so [the MV industry] needs someone to fill the gap,” Tee tells The Edge in an interview.

Apart from natural demand growth arising from the expansion of the national grid, Tee highlights that there is a rising need for cable replacements at existing premises as well.

“Now, demand for cable and electricity is increasing and the [substations’ capacities] are no longer enough, so there is a need for bigger substations and more MV cables. The increase is somehow due to [the increase in] EV (electric vehicle) charging stations as they need a lot of electricity,” he says.

The MV power cables are also utilised by capital-intensive manufacturing facilities — those valued at RM100 million and above — such as automotive plants, pulp and paper mills, semiconductor fabrication plants, steel mills and chemical plants as well as hospitals and commercial buildings, and infrastructure projects such as railway networks and ports.

Master Tec has priced its IPO at 39 sen apiece, which translates to 20 times historical price-earnings ratio and 14 times forward PER — slightly lower than its peer Southern Cable Group Bhd, which has a forward PER of 16 times.

Meanwhile, regional peers Vietnam-listed Taya (Vietnam) Electric Wire and Cable JSC as well as Indonesia-listed PT KMI Wire and Cable Tbk boast a forward PER of 26.4 times and 16.2 times respectively.

Tee says the decision to diversify Master Tec’s product offerings, especially into MV power cables, is aimed at improving its gross profit (GP) margin while augmenting its revenue streams and earnings.

“With the plans and prospect [of venturing into MV power cable manufacturing, this] will generate a higher GP margin from selling the products.

“This industry — electrical generation and transmission — is going to see tremendous growth and with these new plants, hopefully Master Tec will be able to capture some of that growth,” says Tee.

Master Tec’s GP margins were 4.07%, 4.95% and 9.69% in FY2020 to FY2022 respectively, and 17.27% for the six months ended June 30, 2023 (6MFY2023).

Higher GP margins were driven by the increase in the sales of aluminium-cored LV power cables.

Master Tec’s customer portfolio ranges from power utility companies — such as Tenaga Nasional Bhd, Sarawak Energy Bhd and Sabah Electricity Sdn Bhd — to electrical wholesalers, mechanical and electrical contractors and project owners.

Although Master Tec does not have an in-house MV power cable manufacturing plant at present, the group has been selling such products since 2019 by purchasing the cables from local original equipment manufacturers and reselling them under its “Master Tec” and other OEM brands.

The group’s revenue from the trading of MV power cables jumped more than fivefold to RM8.57 million in FY2022 from RM1.57 million in FY2021, while sales grew at a compound annual growth rate (CAGR) of 135.89% between 2020 and 2022.

Upon listing, Master Tec plans to construct two new MV power cable manufacturing plants in Melaka, which are scheduled to commence operations in the fourth quarter of 2024.

Interestingly, the two new plants will only add up to 20 members of staff to its total workforce as they will be equipped with automated machinery and equipment, which will be purchased using the IPO proceeds.

The group is targeting a dividend payout ratio of 30% of its net profit. It had declared a dividend of RM9.78 million, or 50% of its net profit, for FY2022, which was paid to its managing director and sole shareholder Datuk Lau Kim San in April 2023.

After the listing, Lau, who is also the co-founder of Master Tec, will be left with a 17% direct stake and 55% indirect stake as he had transferred 561 million shares to his privately-owned vehicle MTPC Sdn Bhd for RM218.79 million.

Master Tec also intends to explore mergers and acquisitions (M&A) as part of its growth strategy once it has debuted on Bursa Malaysia.

“Of course, after this IPO, there is a possibility for M&A to buy some of our competitors or to consolidate the market. Yes, we have identified two [companies], but it is still in the initial stage,” says Tee.

In the meantime, Master Tec’s priority is to strengthen its team and focus on MV power cable manufacturing before initiating any M&A plans.

For Tee, the fresh capital from Master Tec’s IPO will open up a new chapter for the group to establish itself as a formidable opponent in the MV market and to eventually graduate into the Main Market of Bursa Malaysia.

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