30 JEWELS 2013 Edition
Cahya Mata Sarawak
Excellent Proxy To SCORE
¨ CMS is a Sarawak-centric conglomerate regarded as the best proxy to SCORE, which is set to propel the state’s development
¨ The Group has a tight grip on the fast-growing cement industry in Sarawak while its other core divisions are set to ride on the state’s growth story
¨ Participating in turning SIP into a reality via its 51% and 20% equity stakes respectively in SPD and ferro alloy smelter
¨ We reiterate our BUY rating on CMS with an SOP-based valuation of MYR7.55, implying 1.2x P/BV and a 11.3x P/E on FY14F estimates (ex-cash)
Cahya Mata Sarawak (CMS) is a conglomerate with most of its businesses located in the state of the hornbills. It has evolved from being a single-product manufacturer of cement back at its inception in 1974 into a corporation focused on becoming “the pride of Sarawak". Today, the CMS Group comprises over 40 companies and employs 2,000 people. As the Sarawak Corridor of Renewable Energy (SCORE) is set to take the state economy to new heights, it will bolster CMS’ cement, building materials, construction, property and road maintenance divisions.
Tight grip on fast-growing cement industry. Cement demand in Sarawak grew at a robust >9% annually between 2010 and 2012. The Group’s local expertise enables it to distribute this relatively low-value and bulky material at competitive prices within Sarawak and thus reinforces its strategic monopoly of the state’s cement market. In our recent visit to CMS’ clinker plant in Mambong, Kuching, we gather that its upgraded plant has been operating smoothly since March 2013. The Group is on track to return to the black after incurring a loss of MYR29m in FY12 due to the plant’s prolonged shutdown. We expect the plant’s efficiency to improve and its production to grow from FY14.
Strong growth prospects for other core divisions too. CMS supplies about half of Sarawak’s high-quality asphaltic concrete (premix) and bitumen emulsion requirements. It is also a substantial player in stone aggregates and a trader of various types of construction materials within Sarawak. With the Government setting its sights on the state’s infrastructure development to support the SCORE ambition, we expect the demand for construction-related materials to be well-supported. Separately, the Group maintains approximately 4,800km of state and 680km of federal roads via two separate concession agreements expiring in Dec 2017 and Aug 2018 respectively. We foresee its road maintenance division to be a solid cash cow up to 2018 at the least.
Unlocking value of vast landbank. CMS’ property development division owns large landbank in and around Kuching, the capital of Sarawak. Of this, the two major assets are: i) the remaining 4,211-acre of land in Petra Jaya, which is currently being developed into a riverine township called Bandar Baru Samariang, and ii) a 275-acre landbank in Muara Tebas, currently being developed into Kuching’s new iconic Central Business District named The Isthmus. Plans are in the pipeline to develop other smaller parcels around Kuching as well. With the masterplan well in place – given that various strategic partners had recently sealed their land sales or development deals with the Group amid a booming property market – this division is set to soar.
Cashing in on Samalaju. Samalaju Industrial Park (SIP), which started as a mere ‘dream’ in 2008, is rapidly emerging as a major growth engine for CMS. The Group is participating directly and indirectly in SCORE via its 51% ownership in Samalaju Property Development (SPD), whose first undertaking is the development of an internationalclass temporary workers camp at SIP. Our recent trip to SIP was a fruitful one and we were excited to uncover further upside as the occupancy rate of the workers’ lodge is expected to reach its peak level soon, while the development of the hotel, amenities and residential and commercial properties may be larger than our earlier projections. We also learnt that the commissioning of Phase 1 of a ferro alloy smelting project by 20%-owned OM Materials (Sarawak) SB (OMS) may take place in 2Q14, earlier than our mid-2015 estimate. Though it only holds an associate stake in OMS, we expect this unit to generate rich returns for the Group, thanks to 20 years of cheap power.
Company Report Card
Latest result. We are unperturbed by CMS’ slow start in 1QFY13 as we expect its clinker plant, now being commissioned, to lead the Group’s earnings growth for the next two years.
Balance sheet / Cashflow. CMS’ solid balance sheet, further supported by its net cash position, allows the Group to take on any attractive investment opportunities, particularly in SCORE. ROE. CMS’ robust growth pipelines ensure that it churns double-digit ROEs from 2013 onwards.
Dividend. CMS’ strong cash-generating capacity provides scope to reward shareholders via a 30% payout commitment.
Management. The Group is a professionally-run conglomerate led by its Group MD Dato’ Richard Curtis and a team of highly experienced managers.
We like CMS for its solid fundamentals and our recent visit reaffirmed our bullish view on the Group. We maintain our BUY rating on this stock, with an SOP-based valuation of MYR7.55, implying 1.2x P/BV and a 10.3x P/E on FY14 estimate (ex-cash). Our conservative valuation has yet to include the value of its 20% stake in OMS, which is projected at MYR421m, or MYR1.27 per CMS share, based on our DCF valuation.