CMS,  the  best  proxy  to  the  Sarawak  Corridor  of  Renewable  Energy (SCORE),  attracted  keen  institutional  interest  during  our  US  non-deal roadshow  (NDR).  Investors  see  upside  for  its  OMS  associate  and phosphate  project  under  MPA  given  attractive  power  prices,  while growth at its  other units will be  SCORE-driven. Reiterate  BUY,  with our SOP-based FV revised higher to MYR10.37 (from MYR9.22).

• Hornbill  flies  to  “land  of  the  free’’.  Early  this  month,  Cahya  Mata Sarawak (CMS)  joined us  on a  one-week NDR  to  four major  American cities,  where  it  drew  keen  interest  from  institutional  investors,  judging from  the performance of  its share price, which  spiked up  17.2% during the duration of our roadshow.
• Excellent proxy to SCORE. Generally, most investors like the Sarawakbased  conglomerate,  which  is  professionally-managed,  concurring  with our view that the group is set to benefit from the initiatives  rolled out by SCORE.  These,  together  with  CMS’  direct  participation  in  SCORErelated  projects,  will  benefit  its  cement,  construction  materials, construction, road maintenance and property businesses.
• Scoring with the Americans.  Investors  were attracted by the attractive power  tariffs  offered  to  heavy  industries  in  Samalaju,  Sarawak. Construction  on  Phase  1  of  a  power-hungry  smelting  project  by  the group’s 20%-owned OM Materials (Sarawak) (OMS) is now  in the  final stages, with stage commissioning expected from  July  this year.  Positive progress  is  also  seen  in  its  Malaysian  Phosphate  Additives  SB  (MPA) project, while there is potential upside for 51%-owned Samalaju Property Development SB (SPD). While occupancy rates at its workers lodge may drop,  the  scale  of  works  at  its  hotel,  amenities,  and  residential  and commercial  properties  may  be  larger  than  we  projected  earlier.  Many investors  were also impressed with the group’s logistics prowess , which allows it to maintain its tight grip on Sarawak’s cement market.
• Upside to FV.  While CMS’  share price  has  almost tripled barely  a  year since we initiated coverage, we  still see room for upside  given its robust growth potential. We now value its cement  division  on  par  with  its SEA peers’ P/Es  and revalue its property division based on RNAV.  Following some house-keeping, we derive a higher SOP-based FV of MYR10.37.

Revisiting Our SOP Valuation

Is  there any  more  upside  left?  CMS’  share  price has  gained  191.2%  barely  one year since we initiated coverage, hitting  a multiple-year high  of MYR9.00  on 7 March 2014  as we ended  our  one-week NDR  to the US. Although  many investors we met during our roadshow raised concerns  over  its share price,  which has tripled over the past  year,  most  concurred  that  there  is  still  upside  given  the  group’s  solid  growth potential and valuation, which is still at a discount to its regional cement peers.

Should cement division trade  on par with regional  peers?  After  spending a  year promoting the company,  we  believe that  investors  are beginning  to  understand how the  group’s  logistics  edge  allows  it  to  maintain  its  tight  grip  on  Sarawak’s  cement market.  We  started  coverage  on  CMS  by  valuing  its  cement  division  at  half  of  its regional  peers  in  terms  of  P/E  ratio,  but  have  since  gradually  cut  this  discount  as investors’  knowledge  on  the  unique  cement  market  grew.  In  view  of  American investors’ understanding of CMS’ cement business, we think it is now time to remove our discount on this division. That said, we are valuing CMS’ cement division at 16.6x (vs 14.2x) FY14 earnings, which is on par with its South-East Asian peers, but still at a 20% discount to the  valuation we accord to its West Malaysian peer, Lafarge (LMC MK,  BUY,  FV:  MYR9.61),  as  the  latter  maintains  a  generous  dividend  payout  of >90%.

RNAV for property division.  In the past, we  valued the  group’s property division at a mere MYR270m, which implies only a  10x average PAT from 2014 to 2018. This is a  far  cry  from  the  actual  valuation  on  CMS’  landbank.  Making  a  quick  back-ofenvelope calculation to revalue  its  landbank  in  Kuching area, our computation shows that  the remaining  3,700  acres in Bandar Baru Samariang alone could  easily fetch MYR370m, or a net surplus after tax of some MYR267.8m, benchmarked against its last  disposal  to  Sentoria  (SNT  MK,  NR)  in  the  same  area.  Based  on  the  same calculation for its  other land  parcels to assess their net surpluses, we arrive at a total sum  of MYR422.5m,  ie  after deducting the gains  and applying a  25% corporate tax rate (see Figure 2).

SOP FV revised  higher  to MYR10.37.  Aside from revising the value of its cement and  property  divisions,  we  also  roll  over  our  DCF  valuation  for  CMS’  road maintenance  and  workers  lodge  divisions  from  FY13  to  FY14,  which  results  in marginal  cuts in the  value of both divisions. Apart from this, we also update  the  book value  of  associate,  K&N  Kenanga,  with  its  latest  FY13  numbers.  From  these changes, we derive a new FV of MYR10.37 (from  MYR9.22), which  we deem still far from the stock’s  reasonable range.  Stripping out the  net cash from our valuation, our FV implies 1.6x P/BV and 14.2x FY14 EPS.

Key Assumptions

Financial Exhibits

• The newly-upgraded clinker plant and an upward revision in cement prices will drive 2014 earnings. OMS, in which it owns a 20% stake, is set to be a key earnings contributor from as early as 2H14
• 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 the group’s 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  (CMS),  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 prope rty development.

Recommendation Chart

Source: RHB