Sarawak & Sabah Field Trip

The Land of Abundance

We recently visited the smelting plants of PMETAL and OMH, and the phosphoric plant of CMSB in Samalaju Industrial Park, the two seaports of BIPORT in Bintulu and Samalaju respectively, and the operator of Sabah ports, i.e., SURIA, in Kota Kinabalu, Sabah. We were pleased to see a significant boost in activities as the economy reopens. With a substantial long-term cost advantage over their international peers thanks to the accessibility to cheap hydro power from the Bakun dam (especially against a backdrop of skyrocketing fossil fuel cost at present), we believe the smelters will do well financially as well as being darlings to ESG-focused investors. Meanwhile, Sabah and Sarawak are well positioned to benefit from: (1) trade diversion (away from China) given their locations along the intra-Asia shipping path; (2) the massive development of the new capital city of Indonesia called Nusantara in the neighbouring East Kalimantan (particularly, ports in Sabah being the entry points for construction materials); and (3) being earmarked as part of China’s Belt-and-Road Initiative.

Smelters are in good position to capitalise on cheap and clean hydro power. Many global smelters are cutting their production as their operations have become barely profitable amidst elevated energy costs. Press Metal Aluminium Holdings Bhd (PMETAL; OP; TP: RM5.95) and OM Holdings Ltd (OMH; NOT RATED) are spared given the stable cost of their energy source, i.e., hydro power. In fact, prior to the recent surge in fossil fuel cost, by virtue of them using the cheaper hydro power, they already enjoyed significant cost advantage over their international competitors. With reduced production from fossil fuel-powered smelters in the world, the supply of end-products will remain tight, keeping their prices firm over the short term. Meanwhile, PMETAL will see the first full-year impact in FY22 from its Phase 3 expansion commissioned back in Oct 2022, boasting an additional aluminium smelting capacity of 320,000 MT/annum, while OMH is currently converting its four existing ferrosilicon (FeSi) furnaces into two manganese alloys (Mn Alloys) furnaces and two metallic silicon (MetSi) furnaces (of which end-products command better margins). In addition, OMH has plans to add two more new Mn Alloys furnaces, increasing its total plant output to 610,000-640,000 MT/annum (from 470,000 MT/annum prior to the pandemic). Samalaju Industrial Port of Bintulu Port Holdings Bhd (BIPORT; OP; TP: RM5.95) is poised to benefit from higher throughput backed by a higher aggregate output from the expanded production capacity of key players in Samalaju Industrial Park.

Riding on Samalaju Industrial Park. Cahya Mata Sarawak Bhd (CMSB; NOT RATED) is a key driving force behind Sarawak Corridor of Renewable Energy (SCORE). It is involved in the development of Samalaju Industrial Park as well as a new township in Samalaju, it runs the workers’ hostel and Samalaju Resort Hotel and owns a 25% equity stake in OMH (which it is in the midst of divesting). Its 60%-owned phosphate additives plant under Malaysian Phosphate Additives (Sarawak) Sdn Bhd will fire up its first furnace this month, with the remaining three to gradually come onstream by the end of the year (after a delay of more than two years due to the disruptions from the pandemic). The venture is expected to achieve cash flow breakeven in 2023 before delivering its maiden P&L profits in 2024.

Indonesia’s Nusantara development to boost throughput at seaports in Sabah. Sabah and Sarawak are well positioned to benefit from trade diversion (away from China) given their locations along the intra-Asia shipping path. In addition, they have also been earmarked as part of China’s Belt-and-Road Initiative. Seaports in Sabah, especially Tawau Port adjacent to Nusantara of Suria Capital Holdings Bhd (SURIA; NOT RATED), are poised to benefit from the massive development of Nusantara in the neighbouring East Kalimantan as they will handle the import of building materials for the construction of the new capital city of Indonesia. We understand local companies in Sabah and Sarawak, including those we visited, have already received a deluge of enquires from their potential new clients/partners in Indonesia. We gathered that the USD32.5b Nusantara project will kick start this month and will last another 15-20 years.

Source: Kenanga Research - 11 Aug 2022