• BUY, new TP of MYR1.40 from MYR1.60, 54% upside with c.4% FY22F yield. We recently visited Malaysia Phosphate Additives (Sarawak)’s (MPAS) integrated phosphate facility in Samalaju Industrial Park (SIP), and came away feeling upbeat. MPAS is a JV under a strategic alliance between Samalaju Industries (Cahya Mata Sarawak’s wholly owned subsidiary), Malaysian Phosphate Ventures and Arif Enigma. CMS’ valuation remains undemanding – it is trading around -2SD from the 5-year mean P/E. This report marks the transfer of coverage to Malaysia Research.

• Details of the integrated phosphate complex. Phase 1 of the Samalaju integrated phosphate complex is expected to commence operations in 4Q22, with a total capital expenditure of c.MYR1bn. Under the first phase, the complex will have a manufacturing capacity of 48,000 tonnes pa (tpa) for yellow phosphorus (YP), 75,000tpa for technical phosphoric acid (TPA) and 60,000tpa for food-grade phosphoric acid (FGA).

• Prospects of phosphate production. Prices of YP have spiked amid China’s imposition of restrictions on energy-intensive industries. For instance, the price of YP averaged at USD3,231 per tonne in 2021 while it reached as high as USD7,521 per tonne in February 2022, backed by demand for canned food and phosphate fertilisers in addition to China’s restriction. MPAS posted a lower loss before tax (LBT) of MYR18.1m in FY21 (FY20: LBT of MYR54m), but this should improve once production commences in 4Q22. Management guided that the complex will continue to record some losses in FY22, before breaking even in FY23 and subsequently seeing signs of profitability later in FY24.

• OM Holdings disposal. On 14 Jun, CMS entered into a share-sale agreement with OM Materials (S) for the disposal of its 25% stake in both OM Materials (Sarawak) and OM Materials (Samalaju) for MYR526.6m (target completion: 4Q22). The expected net gain on disposal is MYR147.6m after netting off disposal expenses. While the disposal price is lower than our earlier estimates of MYR912m, CMS could dodge the risk of softer ferrosilicon prices, which peaked in Oct 2021.

• Earnings and valuation. We maintain FY22F earnings but slash FY23-24F net profit by 25-27%, after taking into account the absence of OM Materials (Sarawak). We are also rolling over the valuation base from FY22 to FY23, and imputing the price for the said disposal (MYR526.6m) into our SOP valuation. As a result, we derive a new TP of MYR1.40 (previously MYR1.60) after ascribing an ESG discount of 12% to its intrinsic value, based on our in-house methodology.

• Key risks: Delays in the implementation of proposed state infrastructure projects, and unfavourable developments on governance matters.

Source: RHB Research - 22 Jul 2022