M&A Securities Visit Note PP14767/09/2012(030761) Cahya Mata Sarawak Berhad Thursday, Aug 4, 2016 BUY (TP: RM4.66) On Long Growth Trajectory We recently made a visit to Cahya Mata Sarawak Berhad (CMSB) and came back feeling optimistic on the prospects of OM Materials (ferroalloys manufacturing project) especially after CMSB had signed loan restructuring agreements with banks, essentially mitigating the impact of hedging losses for the group in FY16. With remaining 10 furnaces coming up and running March 2017, we expect OM Materials to turnaround in FY17 in tandem with potential recovery in commodity prices. Moreover, the Pan Borneo Highway (PBH) work contracts will benefit CMSB to great extend thanks to integrated supply chain of construction materials and expertise required in the project. We value CMSB at RM4.66 using SOP valuation, implying 16.0x FY17 PER. We change our call on the stock to a BUY. Recovery on worst hit division. Cement division saw its PBT plunged 67% in 1Q16 from RM29 million to RM10 million, mostly due to higher cost of raw materials and imported cement on weaker Ringgit. Yet, we believe the division will start to recover in 2H16 with subdued impact of weakening Ringgit against USD, expecting PBT contribution to recover to RM100 million level per annum for FY16. Current Price (RM) RM3.62 New Target Price (RM) RM4.66 Previous Target Price (RM) RM3.70 Previous Recommend. HOLD Upside To Target Price 29% Dividend Yield (FY17) 2% Stock Code Bloomberg CMS MK Stock & Market Data Listing MAIN MARKET Sector Diversified Shariah Compliance Yes Issued Shares (mn) 1,074 Market Cap (RM mn) 3,889 YTD Chg In Share Price -29% Beta (x) 0.86 52-week Hi/Lo (RM) 5.84 3.17 3M Average Volume (shrs) 2.37 Estimated Free Float 26% Major Shareholders MajahartaSdnBhd 13% LejlaTaib 10% EPF 9% New cement plant up and ready. The new RM190 million cement plant with 1 million MT/pa in Mambong is ready to fetch higher demand of cement which we expect to reach 1.8 million MT in FY16 and grow by 3-4% every year. Besides, the extra capacity will be catered for pent-up demand including for PBH which the group targets 12,000 MT supply per year until 2021. The cement plant is currently operating at 65-70% of capacity which we reckon at that level CMSB will be able to meet market demand comfortably in the coming years. 1
Construction materials to complement cement division. Having 5 quarries in Stabar, Penkuari, Akud, Sebuyau and Sibanyis, CMSB captures 35% of market share in Sarawak with a combined capacity of 3.45 million MTpa. The group plans to expand its Sibanyis production to 1.3 million MTpa by 2017. Besides that, a new wharf facility will be built in Samarahan by end-2016 to improve transportation and speed up deliveries of crushed aggregate by barge to the areas outside Kuching. The management is upbeat on the demand of stones needed in Sarawak with ongoing PBH which requires 10-15 million MTpa material for the next 4-5 years, on top of the 10 million MTpa yearly demand from private sector. Same as cement division, the ramp-up of capacity in construction materials is set to fetch strong demand from PBH, which we reckon its PBT shall be lifted to RM80-100 million in the coming years. Concession ending 2017-2018 for road maintenance. Two third of the major contracts are expiring gradually in 2016 and the concession will end 2017-2018. This will see a PBT loss of about RM12 million per annum. However, Management is lobbying for contract extension and remains sanguine about the outcome. Should this materialize, we expect earnings from concession will remain intact in the next 4-5 years. On the other hand, the non-road construction order book is currently sitting at RM515 million and the Management is hoping to get another RM200 million construction contract soon for the next 2 years (non-roads order). We expect order book to stay at RM500 million in the next 5 years without considering the RM200 million of potential new contract. ICT business to propel bottom-line growth. Having infrastructure business included in CMSB s portfolio, the group gets to tap into the fast growing ICT business by building and maintaining the State s telecommunication network including towers, on-land fibre network optical fibre submarine cable system and direct internet access. With 50% stake in Sacofa Sdn Bhd (Sacofa), CMSB will stand to benefit RM65 million/rm75 million PBT in FY16/17 respectively as we trust the division would grow its PBT by 10-20% in the foreseeable future. Growth drivers for ICT division include i) fiberization of 309 T3 towers; ii) building new 109 towers; iii) installation of 207 digital microwave links; iv) owns & operates over 5,000 km of on-land fibre network & 950 km optical fibre submarine cable system and v) holding concessions till 2022 to build, manage, lease and maintain towers. These prospects will be bolstered by high broadband penetration rate in Sarawak which is 78.3 per 100 household, above the average rate of 72.2 in the whole country. Samalaju Development - OM Materials. To recall, CMSB suffered a double whammy from OM Materials in face of the plunge in commodity prices and waning Ringgit in FY15. This eventually led to huge hedging losses which amounted to USD15-20 million. Note that currently there are only 6 out of 10 furnaces running. The 6 furnaces will be utilized for manganese production while the remaining 10 will be commissioned in stages and running in full capacity by March 2017. We opine that commodity prices may normalize to pre-crash level by 1H17 coupled with more stabilised Ringgit performance expected in 2017 as the negative impact on oil prices and the controversial sovereign fund scandal have largely been priced in. Hence, we do not expect significant hedging losses to re-occur in FY17 which had dragged the division to negative earnings 2
in FY16. The Management is confident to bring the loss-making division into black underpinned by i) full firing of 16 furnaces with the expected recovery of commodity prices; ii) loan restructuring that allows CMSB to only service the interest instead of repaying the principal (in USD) until 2020 and iii) competitive energy cost throughout ASEAN region as it makes up 60% of the total cost Politically benefited. The new cabinet line-up led by Chief Minister Tan Sri Adenan Satem bodes well for the on-going projects and corporate developments of CMSB thanks to its close relationship with state and federal government. In fact we are assured by the Managing Director, Dato Richard Curtis, that the Management has gained better cooperation with the current state government in all levels of business decisions. Hence, we deem the political risk for CMSB is considerably low, at least for the next 5 years as we are confident on the continuity of the political stability in the state. On the other hand, as pressure mounts on federal government as Sarawak calls for greater autonomy, the Management reckons that political move would not impact CMSB in a negative way. In fact, it would give much more control to the State government over the budget, for instance, in infrastructure works as well as other construction projects such as building schools, roads, etc. As a government linked company, CMSB is poised to benefit and we expect the trading sentiment among investors would be enhanced should the state regains its administrative power from the Federal government which they lost in 1963. Change to forecast. We have tweaked our forecast to incorporate the potential turnaround in OM Materials after being assured by the management that the project will see significant improvement in FY17 as all the furnaces will be up and running. We view that commodity prices such as steel and aluminium are on the verge of recovery supported by restocking event as well as improved demand outlook in China thanks to additional infrastructure projects announced by government earlier this year. Hence we expect, with 25% stake, OM Materials would boost CMSB s bottom line by RM20 million/rm22 million in FY17/18, respectively. On the other hand, we revise our earnings estimate on Sacofa by 23% from RM95 million to RM117 million, expecting 10-15% PBT growth that would further drive CMSB s PBT to RM65 million/rm75 million in FY16/17, respectively, after taking into account 50% stake owned by the group. We deem this is reasonable given the exclusive rights of Sacofa to construct, own and manage all towers in Sarawak as well as digitalisation plan that involves fiberization of towers, building new towers and installing digital microwave links. We also raise our earnings forecast for CMSB s in three core business divisions namely cement, construction materials & trading and construction & road maintenance by circa10% from RM212 million to RM233 million. These core segments will be largely bolstered by demand growth of industrial products in private sector as well as pipeline infrastructure projects such as PBH and Sarawak Corridor of Renewable Energy (SCORE) programme. 3
Valuation and recommendation. CMSB is an integrated construction company with manufacturing capability in supplying construction materials as well as specialization in building infrastructure and maintenance works. Despite having close tie-up with the state government, the Management of CMSB is led by a team of professional personnel with proven track record in the industry. At this stage, CMSB s earnings will continue to move northbound fuelled by 5 growth nodes of SCORE, Samalaju Development (OM Materials & Malaysian Phosphate Additives) and recurrent cash flow business in ICT division (Sacofa). Politically wise, we reckon it should be positive for the group s bottom line growth as Sarawak is about to gain greater autonomy over state administration. This is because autonomy will give the state government better control over the budget spending, potentially speeding up the on-going state building programmes which could see CMSB as one of the biggest beneficiaries. We raise our target price from RM3.70 to RM4.66 based on SOTP valuation, ascribing 50% discount to the RNAV for property segment amid the slowdown in property industry. We have removed the 15% discount assigned in our previous valuation due to Sarawak election in May 2016. The SOTP/share of RM4.66 implies 16.0x FY17 PER, which is in line with consensus PER of 15.6x and current PER of 20.9x. We upgrade the call on CMSB from a HOLD to a BUY. Exhibit 1: Sum-of-parts (SOP) Valuation Business division Valuation Effective Method stake PER (x) Value (RM mil) Cement PER 100% 22 1,734 Construction Material PER 51% 20 682 Road Maintenance PER 100% 12 1,043 Property RNAV (50% discount) 234 OM Sarawak PER 25% 5 100 Sacofa PER 50% 15 876 Total value 4,670 K&N Kenanga 25% 90 KKB Engineering 20% 85 Net Cash (minus Inv. In Sacofa) 162 Total Equity Value 5,007 Share Base 1,074 SOTP/share (RM) 4.66 Source: M&A Securities 4
Jul-14 Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16 FY14 FY15 FY16F FY17F FY18F Price (RM) Points RM million Visit Note Cahya Mata Sarawak Berhad Exhibit 2: CMS Profit and Loss (FY14-FY18F) FYE Dec (RM mn) FY14 FY15 FY16F FY17F FY18F Revenue 1,674 1,788 1,752 1,862 1,987 Gross profit 396 413 385 447 477 EBITDA 369 400 375 439 473 EBIT 327 347 308 368 393 Finance cost -4-4 -7-8 -7 Associates 17 37 19 95 102 JV 1 2 2 2 2 PBT 341 382 322 457 490 Taxation -76-84 -80-114 -122 PAT 266 298 241 343 367 Minority interest -44-56 -50-58 -62 Net profit 221 242 191 285 305 EPS (sen) 21 22 18 26 28 EBITDA margin 22% 22% 21% 24% 24% EBIT margin 20% 19% 18% 20% 20% PBT margin 20% 21% 18% 25% 25% Net profit margin 13% 14% 11% 15% 15% PER (x) 18 22 19 12 12 P/BV (x) 2 3 2 2 2 Dividend (sen) 9 5 7 11 11 Source: Bursa Malaysia, M&A Securities 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Exhibit 3: Share Price Performance & Earnings Forecast CMS Share Price vs. KLCI Revenue vs. Net Profit (July 2014-July 2016) (FY14-FY18F) 1,900 1,850 1,800 1,750 1,700 1,650 1,600 1,550 1,500 1,450 2,500 2,000 1,987 1,788 1,862 1,674 1,752 1,500 1,000 500 221 242 191 285 305 0 CMSB (LHS) FBMKLCI (RHS) Revenue Net Profit Source: Bloomberg, M&A Securities 5
Exhibit 4: SCORE Project Source: Company Exhibit 5: OM Materials (Samalaju Development) Source: Company Exhibit 6: Sacofa (ICT division) Source: Company 6
M&A Securities STOCK RECOMMENDATIONS BUY Share price is expected to be +10% over the next 12 months. TRADING BUY Share price is expected to be +10% within 3-months due to positive newsflow. HOLD Share price is expected to be between -10% and +10% over the next 12 months. SELL Share price is expected to be -10% over the next 12 months. SECTOR RECOMMENDATIONS OVERWEIGHT The sector is expected to outperform the FBM KLCI over the next 12 months. NEUTRAL The sector is expected to perform in line with the FBM KLCI over the next 12 months. UNDERWEIGHT The sector is expected to underperform the FBM KLCI over the next 12 months. DISCLOSURES AND DISCLAIMER This report has been prepared by M&A SECURITIES SDN BHD. Readers should be fully aware that this report is for informational purposes only and no representation or warranty, expressed or implied is made as to the accuracy, completeness or reliability of the information or opinion contained herein. The recommendation and opinion are based on information obtained or derived from sources believed to be reliable. This report contains financial forecast/projection based on our assumptions which may defer from the actual financial results announced by the companies under coverage. All opinions, estimates and assumptions are subject to change without notice. Analysts will initiate, update and cease coverage solely at the discretion of M&A SECURITIES SDN BHD. Investors are to be cautioned that value of any securities invested may fluctuate from time to time. We advise investors to seek financial, legal and other advice for investing based on the recommendation of our report as we have not taken into account each investors specific investment objectives, risk tolerance and financial position. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. M&A SECURITIES SDN BHD can accept no liability for any consequential loss or damage whether direct or indirect. Investment should be made at investors own risks. M&A SECURITIES SDN BHD and INSAS GROUP of companies, their respective directors, officers, employees and connected parties may have interest in any of the securities mentioned and may benefit from the information herein. M&A SECURITIES SDN BHD and INSAS GROUP of companies and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. This report may not be reproduced, distributed or published in any form or for any purpose. M & A Securities SdnBhd (15017-H) (A wholly-owned subsidiary of INSAS BERHAD) A Participating Organisation of Bursa Malaysia Securities Berhad Principal Office: Level 1,2,3 No.45 & 47,43-6 The Boulevard, Mid Valley City, Lingkaran Syed Putra, 59200 Kuala Lumpur Tel: +603 2282 1820 Fax: +603 2283 1893 Website: www.mnaonline.com.my 7