Cahya Mata Sarawak

Cahya Mata Sarawak (CMS MK): Positioned for Growth Amid Sarawak’s Construction Boom

Overview:

Cahya Mata Sarawak (CMS) is a leading conglomerate in Sarawak, Malaysia, with diversified business segments, including cement manufacturing, construction materials, road maintenance, property development, and oil tools. The company holds a unique position as the sole cement producer in Sarawak, making it a crucial player in the state’s infrastructure development. CMS’s significant exposure to construction and digital infrastructure projects places it at the forefront of Sarawak’s economic growth.

Recommendation and Target Price:

Recommendation: BUY
Target Price: MYR 1.60
Current Price: MYR 1.34
Potential Upside: +22%
Broker: Maybank Investment Bank
Date of Recommendation: September 10, 2024

Key Investment Highlights:

1. Solid Position in Sarawak’s Cement and Construction Materials Market

Cahya Mata Sarawak is the only cement producer in Sarawak, ensuring a monopolistic advantage in this critical market. The company also has a significant presence in supplying construction materials like aggregates and premix for infrastructure projects in the state.

Cement Division Performance: The cement division reported a profit before tax (PBT) margin of 23.6% in 1H24, benefiting from lower imported clinker costs and improved operational efficiencies. Although sales volume was down due to the rainy season in 1H24, demand is expected to pick up in 2H24 with the completion of delayed projects and continued infrastructure development across Sarawak.
Construction Materials and Trading: CMS’s construction materials and trading segments also benefit from Sarawak’s expanding infrastructure. As more government-backed projects are initiated, these segments are expected to see steady demand.

2. Digital Infrastructure Expansion through SACOFA

CMS owns 50% of SACOFA, which provides telecommunications infrastructure in Sarawak. SACOFA operates approximately 1,700 towers and a 12,000km fiber network throughout the state. As Sarawak pushes towards digitalization, SACOFA is expected to be a significant beneficiary of the government’s efforts to enhance telecommunications and internet services.

ICT Growth: With the state’s ambition to become a fully digital economy, SACOFA’s revenue is set to grow in tandem with increased demand for telecommunications services. This makes SACOFA a key growth driver for CMS in the medium to long term.

3. Oiltools Segment Poised for Continued Growth

Cahya Mata Sarawak acquired 75% of Cahya Mata Oiltools in 2022, an integrated provider of drilling fluids and waste management solutions for the oil and gas sector. With a presence in nine countries, including Malaysia, Indonesia, and Saudi Arabia, Oiltools has been expanding its order book, which reached MYR 500 million as of June 2024.

Growth in 2024: In 1H24, Oiltools delivered a 73% YoY increase in PBT, contributing 26% to the group’s total PBT. The company’s continued success in securing new contracts and expanding its market share positions it well for further growth in the oil and gas sector.

4. Phosphate Complex: A Potential Long-Term Growth Driver

CMS has invested in an integrated phosphate complex in Samalaju, which, although currently embroiled in a legal dispute, presents long-term growth potential. The complex aims to supply high-value phosphate products, but the operation has been delayed due to disputes over electricity supply contracts with SESCO.

Challenges: The phosphate operation posted a MYR 40 million loss before tax in 1H24, primarily due to costs incurred while preparing for commercialization. Arbitration hearings are set for 2025, and a favorable outcome could unlock significant value for CMS in the future.

5. Strong Financial Metrics and Undemanding Valuation

CMS remains financially sound, with strong cash flows and minimal debt, which enables the company to weather short-term headwinds and take advantage of growth opportunities.

Revenue Growth: CMS achieved 18.8% YoY growth in FY23A, driven by higher cement sales and improved margins.
EBITDA Growth: The company expects 47.5% YoY EBITDA growth in FY24E, thanks to cost efficiencies and the anticipated recovery in cement demand.
Valuation: With the stock trading at just 9.8x FY24E PER, CMS offers an attractive entry point for investors, especially given its dominant position in Sarawak’s construction and digital infrastructure sectors. The target price of MYR 1.60 suggests a potential upside of 22%.

Risks to Consider:

Legal Dispute in Phosphate Division: The ongoing legal dispute between CMS’s phosphate operation and SESCO over electricity supply poses a risk. If the arbitration does not result in a favorable outcome, the phosphate segment could continue to be a drag on CMS’s earnings.
Volatility in Raw Material Prices: CMS’s profitability in the cement and construction materials businesses is sensitive to fluctuations in raw material and fuel prices. An unexpected spike in these costs could negatively impact margins.
Market Share Threats: Although CMS has a monopoly in Sarawak’s cement industry, the entry of new competitors could challenge its market share, especially in construction materials and road maintenance.

Valuation and Financial Projections:

Revenue Projections: CMS is expected to generate MYR 1,191 million in revenue for FY24E, with a steady growth rate of approximately 3% annually over the next two years.
EBITDA Projections: EBITDA is projected to reach MYR 230 million in FY24E, representing a 47.5% YoY increase. This growth is supported by improved operational efficiencies and stronger demand in its core segments.
Core Net Profit: CMS’s core net profit is forecasted to grow by 28.6% YoY to MYR 147 million in FY24E, driven by stronger performance in the cement and Oiltools divisions.
Dividend Yield: CMS has a dividend payout ratio of 30% of net profit, with an expected dividend yield of 1.5% in FY24E.

Conclusion:

Cahya Mata Sarawak is well-positioned to capitalize on Sarawak’s infrastructure boom, driven by its cement and construction materials businesses, digital infrastructure through SACOFA, and the growing Oiltools segment. While the phosphate division presents some risks, a favorable arbitration outcome could unlock significant value. With an undemanding valuation and a target price of MYR 1.60, CMS offers a compelling investment opportunity with a 22% upside potential.

Investors seeking exposure to the growth of Sarawak’s economy should consider CMS as a strong buy, especially given its strategic position in key sectors like construction and telecommunications.

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