We hosted a group visit to CMS’  operation in Samalaju. Its OMS is now at  progressive  commissioning  stage  and  its  phosphate  project  under MPA is making good progress  –  both are set to  enjoy  attractive power tariffs  at  SCORE.  We  expect  its  property  development  in  Samalaju  toreach a larger scale and be completed earlier than expected.  Maintain BUY with a higher SOP-based TP of MYR5.00, implying a 16.6% upside. 

Ground zero at Samalaju. Early this week, we hosted a small group site visit to  Cahya Mata Sarawak’s  (CMS)  operation in Samalaju, Sarawak. Besides  visiting  its  property  site  at  Samalaju  Industrial  Park  (SIP)  and the workers’  camp, we are proud to be  the  first group of investors  who had the opportunity  to witness  the commissioning of  the  first ferrosilicon furnace owned by its 20%-owned OM Materials (Sarawak) (OMS).

All  set  to  SCORE.  The  Sarawak  Corridor  of  Renewable  Energy’s(SCORE)  key  advantage  is  the  availability  of  attractive  power  tariffs. Phase  1  of  OMS’  power-intensive  smelter  is  entering  progressive commissioning stage –  the  first furnace  has just commissioned and the company  is  heating  up  the  second  one.  Meanwhile,  CMS’  Malaysian Phosphate Additives SB (MPA) project is  also progressing well,  while  its 51%-owned Samalaju Property Development SB (SPD) may offer  some upside.  We  believe  that  the  earnings  decline  at  the  latter’s  workers’ lodge  may  be  mitigated  by  its  property  developments  in  Samalaju ,  for 
which we expect  to  reach a  larger scale and be  completed earlier than originally expected.

Cement  unit  the  immediate  catalyst.  We  continue  to  like  CMS’  tight grip  on  Sarawak’s  cement  market,  thanks  to  its  logistics  prowess. Management expects the cement unit to post  a  strong performance  this year, especially  after  CMS  raised its selling prices  in mid-February.  The group is also in the midst of installing a brownfield 1m  tonne/annum (tpa) grinding plant next to its clinker facility. 

BUY with a higher MYR5.00 TP. Investors who joined us on the trip aregenerally receptive to CMS’ businesses. The group’s huge cash pile also allows  it to take on projects with attractive returns  in  SCORE or others, which may  boost its future earnings.  Maintain BUY with our  SOP-based TP  raised to  MYR5.00 (from MYR4.85),  as we lifted  the  DCF value of  its OMS project.

OMS Firing Up Its Furnaces

Investment  in OMS.  In  2011,  CMS  acquired  a  20%  equity  stake  in  OM  Materials (Sarawak)  SB (OMS),  a subsidiary  of OM  Holdings  Ltd  (OMH  AX,  NR). OMH  is  a listed Australian miner, manufacturer and trader of manganese, iron and chrome ores and alloys, while OMS  is tasked to develop a world-class greenfield ferrosilicon and alloy  manganese  smelter  at  Samalaju  Industrial  Park  (SIP)  in  Sarawak,  Malaysia. The  project’s  annual  production  capacity  is  expected  to  reach  575,000tpa  of  ferro alloys, consisting of 310,000tpa of ferrosilicon alloys  in  Phase 1  and  265,000tpa of manganese ferro alloys  in Phase 2, in addition to  300,000tpa of sintered manganese ores,  most  of  which  will  be  used  internally  in  the  manganese  alloy  production process. The total projected capex is estimated at USD592m.

Low-cost smelter.  The key competitive advantage of this smelter project lies in its access to a long-term reliable supply of hydro energy power totalling 500MW at very competitive  tariffs. Ferro  alloy  production  requires  very  high  energy  consumption  – about 4,500  kilowatts per hour (KWh)  per tonne of silico manganese  at around  25% of its total direct production cost, and around 9,100KWh a tonne of ferro silicon, close to 48% of its total direct production cost. OMS’ 20-year  power purchase agreement (PPA), which ensures competitive power tariffs under SCORE development  thanks to low-cost  hydro  generation,  gives  it  a  strong  edge  over  its  competitors.  OMS  also enjoys  other  competitive  advantages,  including:  i)  close  proximity  to  raw  materials and  to  major  markets  and  customers  in  Asia,  ii)  existing  and  newly-built infrastructure,  iii) a lack of import and/or export duties, and iv) a 5-year tax holiday, among  others.  Meanwhile,  OMS’  independent  consultant,  CRU,  forecast  that  its ferrosilicon  plant will  likely  be at  the  first quartile of  the  global production cost curve (see Figure 1).

Site visit to OMS. On Monday evening, we were proud to be  the  very first group of investors  who  had  the  opportunity  to  witness  the  commissioning  of  OMS’  first ferrosilicon  furnace.  Management  was  happy  with  the  progress  of  its  first  furnace, which  it  described  as  smoother  than  originally  expected.  We  understand  that  thesecond  furnace  has  been  heated  up since  26  Sep  2014  and  first  metal  can  beexpected  in  the  next  few  days.  Management  still  targets  the  full  commissioning  of Phase 1 by end-1H15.

Revisiting DCF of OMS. In the past, we had made quick DCF calculations to assess the  valuation  of  this  project  based  on  the  limited  information  available.  While  wecontinue to  expect  minimal financial impact for  FY14 given  the smelter’s  huge start up costs  and progressive commissioning, its  smoother-than-expected commissioning prompted us to revisit our financial model. Still relying solely on power cost-saving vselectricity  tariffs  in  China  in  our  financial  modeling,  we  increase  our  projected utilisation  rate  and  bump  up  our  terminal  value  to  MYR450.9m  from  MYR298m, which  we  deem  overly  conservative.  All  in,  we  derive  a  higher  DCF  valuation  of MYR3bn, up from the original value of MYR2.1bn. As a result, a 20% stake in OMS is now worth MYR599m (from MYR421m previously).

Samalaju Township In The Making

Visit to SPD’s site. CMS’ 51%-owned Samalaju Property Development SB (SPD) is spearheading  Sarawak’s  first  green  township  development  to  cater  largely  to  an anticipated  sizeable  population  of  expatriates  and  workers  in  the  energy-intensive industries in  SIP.  Our visit to Samalaju  would  not be  complete without  a  visit to  the property site within the industrial park.

Samalaju  Township  in  good  progress.  SPD  is  currently  developing  Samalaju Township  Phase  I.  The  township’s masterplan is  still  being  finalised.  Adjoining the SIP, the new township’s population may  expand  to 45,000 by 2018. During our visit on  Monday,  we  witnessed  construction  on  a  150-room  hotel  and  nine  units  of  3-bedroom  chalet,  which  are  70%-completed.  Management  is  targeting  the  official opening of Tanjung Samalaju Resort Hotel in Dec  2014. We  also visited  Phase 1 of Samalaju Eco Park,  where  piling works  for the first 10 blocks of walk-up apartments (160 units) are still at the early stage, while earthworks have started on a commercial site  next to this residential project. Meanwhile,  earthworks for a  services centre that will  be  equipped  with  shops and  other  amenities  have  just been  completed.  In  the evening, we  checked in  at Samalaju Executive Lodge. W e  are privileged to be  the first  group  of  investors  who  have  stayed  in  this  camp.  The  occupancy  rate  at  the camp has plunged  substantially, with its occupants  being mainly OMS workers. SPD management  is  talking  to  other  contractors  to  move  their  workers  to  this  camp  or potentially convert  part  of the camp to suit plant  operators’ needs in order to boost occupancy.

Conservative RNAV for SPD.  We  ascribe MYR102m for  CMS’  51% stake in SPD. The  valuation  is  based  on  an  RNAV  of  MYR100k  per  acre  for  2,000  acres  of landbank  owned in SIP. We also believe that the earnings drop at the workers’ lodge may be mitigated by its property developments in Samalaju. We expect the latter to reach a larger scale and be completed earlier than originally expected.   We prefer to remain conservative in  our valuation although management is projecting a total GDV of MYR5bn for SPD till 2030.

Valuation & Recommendation
Nudging up FY15 estimate.  Following the smoother-than-expected commissioning at OMS, we now  expect it to report higher average utilisation, which should  translate into  higher  profit  in  FY15.  Hence,  we  slightly  raise  our  FY15  profit  estimate  to MYR270.7m,  up  3.1%  from  our  original  projection.  That  said,  we  keep  our  FY14 estimate  unchanged  as  we  continue  to  expect  limited  financial  impact  from  OMS given that its smelter is still at an  initial commissioning stage. 

Lifting SOP-based  TP to MYR5.00, maintain BUY.  As CMS is a  conglomerate with various business operations  in Sarawak, we have been using SOP methodology to value the group. In this report, we  revisit  our DCF valuation for its 20% stake in OMSand  update  our  SOP  calculation  accordingly.  With  that,  we  derive  a  new  TP  of MYR5.00  (from  MYR4.85),  which  we  deem  reasonable.  Stripping  out  the  net  cash from our valuation, our TP  implies  a  2.2x  P/BV and 16.4x FY14 EPS.  The group’s huge cash pile  also allows  it to take on projects with attractive returns  in  SCORE or others,  which  may  lift  future  earnings.  We  maintain  our  BUY  recommendation  onCMS.

Source: RHB