What’s New

• 4Q16 results above expectations due to higher sales and better contribution from JV
• Declared 6.3sen DPS (40% payout)
• FY17-18 earnings unchanged as we had already projected earnings recovery for CMS in 2017
• Removing holding company discount; maintain HOLD with higher SOP-based TP of RM4.30

Picking up steam. Due to the limited upside, we maintain our HOLD call on Cahya Mata Sarawak (CMS) albeit with higher SOP-based TP of RM4.30 after removing our 10% holding company discount. Operating performance at 25%-owned OM Sarawak seems to be turning around alongside an improving ferrosilicon market, while converting excess furnaces to produce manganese alloy (since Dec 2016) should also help to contribute to better earnings for OM Sarawak in 2017. With less earnings drag from OM Sarawak going forward, we believe sentiment on the stock is turning more positive, especially with the imminent rollout of Pan Borneo Highway projects which will benefit CMS’ key operating segments – i.e. the cement, construction materials, and road maintenance businesses.

Some light for OM Sarawak. For the Dec quarter, production of ferrosilicon was flattish q-o-q, with furnaces in operation (6-7 out of 10) running at full utilisation rate. Nonetheless, sales tonnage improved by 10% q-o-q given continued recovery in the ferrosilicon market in the Asia region. Additionally, in Dec 2016, OM Sarawak has also successfully achieved hot commissioning and production of silicon-manganese, which was part of its restructuring plan to modify six furnaces to produce manganese alloy given the better demand dynamics.

Valuation:

In view of the improving performance of OM Sarawak and the ferrosilicon market as a whole, we have removed the holding company discount and hence raised our SOP-based TP for CMS to RM4.30. Our RM4.30 TP implies 19.2x FY17 PE and 2.0x P/B.

Key Risks to Our View:

Raw material costs. Fluctuations in raw material costs (i.e. coal, steel) will impact margins for the cement and building material divisions. Forex will also play a role as some of the raw material purchases are transacted in USD (such as coal and imported clinker).

Source: Alliance Research - 28 Feb 2017