CMS  posted  record  earnings  again,  at  MYR175.4m  (+26.4%  y-o-y)  in FY13,  thanks  to improvement in all divisions  -  especially a  turnaround in its clinker unit. While its clinker unit is set to improve further in FY14, other divisions will benefit from SCORE developments. All eyes are now on  the  commissioning of  the  OMS smelter in 2H14. Maintain BUY, with our SOP based-FV nudged up to MYR9.22 after some housekeeping.

• Another record year.  Cahya Mata Sarawak (CMS)’s  FY13 net profit  of MYR175.4m outperformed our/street estimates by 6.5/9.0% respectively. Its  FY13  bottomline  rose by  26.4% y-o-y  even though depreciation costs surged 58.0% y-o-y after management accelerated the depreciation of its workers’ lodge asset. Otherwise, earnings would have been better - lifted mostly by the turnaround of its clinker plant which resumed operations in late  March  2013.  All other  units  recorded better  results compared  with the preceding year. This, once again, is a testimony to the success of its present management in rationalising its businesses.
• All  turbines  still  firing.  We  expect  the  efficiency  of  CMS’  newlyupgraded  clinker  plant  to  improve  further  as  it  reaches  optimum production volume  in 2014. The group is also likely to book another  land sale to Sentoria (SNT MK, NR) in 1Q14. That said, the Sarawak Corridor of  Renewable  Energy  (SCORE)  is  well  on  track  to  propel  the  state’s economy, thereby directly  and  indirectly boosting the growth of all  CMS’ businesses.  Our  key  focus  is  on  its  20%  stake  in  OM  Sarawak  SB’s (OMS)  smelting  project,  which  offers  potentially  rich  returns  given  its access to 20 years of cheap power. We also see upside for 51%-owned Samalaju  Property  Development  SB,  while  positive  progress  has  also been made in its Malaysian Phosphate Additives (MPA) project.
• Reiterate BUY.  We make no change to our estimates,  other than minor housekeeping  adjustments after updating our  FY13  numbers.  While we raise  the  P/E  of  its  cement  division  to  14.2x  from  13.7x  as  the  share prices of its local peers have since inched up, we also lower  the value of its 20% stake in KKB Engineering (KKB MK, NEUTRAL) as we recently trimmed  our FV for KKB to MYR2.39  from MYR2.74.  As such, our  SOPbased  FV  rises  to  MYR9.22  (from  MYR9.15)  post  adjustments.  We reiterate our BUY recommendation on CMS.

Key Assumptions

Financial Exhibits

• The commissioning of its newly-upgraded clinker plant will drive earnings into 2014. OMS, in which it owns a 20% stake, is set to be a key earnings contributor from as early as 2014
• Its strong cash-generating capacity provides room to reward shareholders via a 30% payout commitment
• The group’s solid balance sheet enables it to take on any attractive investment opportunities, particularly in SCORE
• We project decent earnings growth over the short- to medium-term, which will continue to bolster its key financial ratios

SWOT Analysis

• CMS’ rationalisation in the past few years has put it on the right footing to capitalise on the opportunities arising from SCORE

Company Profile
Cahya Mata Sarawak, a conglomerate with most of its operations based in Sarawak, has its main busines s in cement manufacturing. The group is also involved in building materials, construction, road maintenance and property development.

Recommendation Chart

Source: RHB