Investment Highlights

• We raise our FY21–22F net profit forecasts by 18% and 17% respectively, and increase our fair value by 48% to RM1.83/share (from RM1.24/share) for Cahya Mata Sarawak (CMS) based on 10x FY21F EPS (from 8x previously). We peg CMS to a higher PE following an increase in its market value in the past two weeks, rendering it more investable to large institutional investors. Upgrade to BUY.
• Key highlights from analyst briefing:

1. We understand that the group is undergoing an annual maintenance of its clinker plant, along with the Phase 2 upgrade, which is expected to be completed in 1Q 2021. With that, we expect 4Q20’s cement division earnings to be slightly lower than in 3Q20 – due to the upgrades, which would result in slightly lower production volumes of clinker and cement.

Recall, CMS is ramping up its in-house clinker production capacity from 625K tonnes at present to 700K tonnes under the Phase 2 upgrading, and further to 750K tonnes under Phase 3. The rationale is to reduce its reliance on clinker imports of which prices could spike occasionally, hurting its cement margins.

Upon the completion of the upgrading, we estimate that CMS’ dependence on clinker imports (largely from Southeast Asia and Peninsular Malaysia) will decline from 60% to 45–50%. Based on our channel checks, the market demand of cement in Sarawak is about 1.7mil tonnes annually.

2. We understand that 25%-owned OM Materials (Sarawak) will continue to be in the red in 2HFY20. This is mainly due to a prolonged weak ferrosilicon prices (FeSi), coupled with underwhelming sales volume as only six out of a total of 10 FeSi furnaces were running. Also, there has been a slight hiccup in operation with four ferrosilicon furnaces (out of a total of 16) currently offline due to maintenance and traveling restrictions on expatriate engineers (from China).

However, the group targets OM Materials to return into the black in 2HFY21, and we believe that this is not going to be an easy feat until the Phase 2 expansion plan is completed by 2022.

We note that the expansion plan of OM Materials (Sarawak) is on track. Recall, OM Materials (Sarawak) has set aside A$20mil (RM60mil) for its Phase 2 expansion, comprising largely a sinter plant which will lower its manganese alloy production costs. Slated for completion in FY22F, the expansion plan entails the modification of 2 existing FeSi furnaces to produce metallic silicon and silicomanganese; and the construction of up to four more manganese alloy furnaces.

3. We gather that CMS will be bidding for state government public infrastructure projects ahead of the 12th Sarawak state election (that will have to be called by Sep 2021). Among those are the Coastal Road and Second Trunk Road packages, along with the Sarawak Light Transit Rail (LRT) and the Autonomous Rail Transit (ART). Given that CMS has a dominant cement business in East Malaysia, it will be a key beneficiary if the state government chooses to roll-out the public infrastructure projects – regardless of whether CMS wins the job packages or not.

4. The US dollar has severely weakened against the MYR – falling from RM4.36 in March 2020 to RM4.07 at present. The cement division (which typically contributes to about 30% of group’s earnings), will benefit from a weaker USD due to its heavy dependence on imported clinkers. In addition, we gather that prices are low at US$49/tonne currently (while they have eased from US$58/tonne in FY19, they are still significantly higher vs. about US$38/tonne prior to FY19). Hence, we raise our FY21–22F margin assumptions for the cement division on the back of lower cost of imported clinker due to the weaker USD.

• As the Sarawak state election draws closer, we think that there is an elevated likelihood of infrastructure projects being rolled out – funded by the state government. Besides, we think that the group’s earnings would stabilize as the worst is now over with the economy moving towards a recovery. Upgrade to BUY.

Source: AmInvest Research - 1 Dec 2020