Investment Merits

• Niche exposure in the medical component supplier space
• Strong relationships with healthcare and automotive partners
• Pipeline of new products set for commercialisation in coming quarters
• Robust balance sheet

Company Profile

Supercomnet Technologies (SCT) was incorporated in Malaysia in May 1990 as Supercomal Wires and Cables. In Apr 1999, it was the first company to be listed on the ACE Market. It was then transferred to the Main Market of Bursa Malaysia in Aug 2023. SCT has three major segments – medical, automotive cables, and industrial wiring and cables. The medical segment is the largest revenue contributor, accounting for c.71% of turnover last year. The company manufactures medical devices and special tubing for delivery systems. The automotive cables division contributed c.9% of FY23 revenue and is involved in the manufacture and assembly of fuel tanks, wires, and cables. The industrial wiring and cables segment accounts for the remaining 20% of revenue, with products used in electrical appliances and for other general means. SCT’s manufacturing operations are based in Sungai Petani, Kedah.

Highlights

Strong relationships backed by R&D capabilities. Within the medical segment, SCT has well-established relationships with tier-1 healthcare partners. For many medical devices, SCT is the sole supplier for its customers, thanks to its technological innovations and reliability. Furthermore, the company has developed a strong name in R&D capabilities to produce sophisticated medical devices that are mainly exported to North America and Europe. A typical medical product usually needs an R&D period of 4-5 years and approval from the US Food & Drug Administration (FDA). As for the automotive cables segment, SCT is currently the only supplier of wire harnesses and fuel tanks for a European car company in the Asia-Pacific.

Medical devices – ongoing stable demand and new products will drive topline. The medical segment will continue to be an important driver of both its topline and bottomline, in our view. Key drivers for this segment include stable ongoing demand for existing products, coupled with a pipeline of new products set for commercialisation in the coming quarters. Margins for this segment tend to be higher relative to other divisions, and the shift in sales mix towards medical devices should be positive for overall margins as well.

Automotive. For the automotive cables segment, SCT supplies wire harnesses and fuel tanks for four models to the abovementioned European car company. The automaker is currently evaluating its manufacturing plant in Gurun, Kedah for its potential to become a regional manufacturing hub for battery EVs (BEVs). If this materialises, we believe SCT stands a good chance to be part of the supply chain for BEVs – a mid- to longer-term positive.

Healthy balance sheet can comfortably fund capacity expansion or M&As. SCT does not need to rely on borrowings since it has a healthy cash pile as well as financial assets that can be converted into cash, if needed. We believe SCT can easily fund its capex requirements for growth, and, if necessary, opt for M&As to broaden/diversify its product range as well as enlarge its capacity.

Company Report Card

Results highlights. FY23 revenue fell 13% YoY on a temporary drop in automotive cables revenue and lower industrial wiring and cables turnover, as SCT prioritised higher-margin opportunities. Consequently, net profit declined by 12% YoY to MYR29m from lower revenue, coupled with share-based compensation expenses and one-off costs related to the transfer to Main Market, cushioned by a lower effective tax rate.

Strong net cash position. SCT has a clean balance sheet with no borrowings and debt securities. Net cash was at MYR28m at end-2023, and in addition to other financial assets related to investments in money market funds worth MYR166m. Over the past three years, its ROEs ranged between 8% and 12%. Going forward, ROEs are expected to stay within the range.

Dividends. While it does not have a dividend policy, SCT declared DPS of 2 sen for FY22 and FY23 and, prior to that, had been declaring DPS of 1.5 sen. This translates to dividend payout ratios of 33-53% for FY21-23.

Management. Group Managing Director James Shiue Jong-Zone joined Supercomal Wires and Cables back in 1993 as its general manager. His previous stints include Matsushita and Sanyo Electrical. Prior to joining SCT, he had started his own company, King Royal Electrical, which was involved in wire harnessing, cable moulding assembly, and other electrical/electronic products.

Investment Case

Niche exposure underpinned by solid partnerships. We like SCT for its niche exposure to the medical and automotive component supplier space. The company has well-established partnerships with its tier-1 healthcare and automotive partners from developed countries. Given the rising demand for healthcare products and services, as well as various technology breakthroughs in the global medical industry, we think the demand for medical devices will continue to grow over the longer term.

Valuation. SCT’s 10-year historical P/E range is quite wide, ranging from 8x to 74x, with an average of 34x. Meanwhile, its historical P/E range was 35-38x during the pre-pandemic period. Ascribing a P/E of 34-36x to FY25F fully diluted EPS, we derive a fair value range of MYR1.69-1.79. Our ascribed 34-36x P/E is broadly in line with the KLHEAL’s P/E of 34x.

Risks include regulatory risks affecting medical device sales, weakerthan-expected demand from key customers, and fluctuations in raw material prices and FX rates.

Source: RHB Securities Research - 15 May 2024