Pan Borneo Highway set to boost CMS earnings

KUALA LUMPUR (April 25): Cahya Mata Sarawak Bhd (CMS), which has been awarded a Pan Borneo Highway contract, expects to benefit even more from the spillover effects of the mega highway project.

Its managing director (MD) Datuk Richard Curtis said the project will beef up demand for construction materials and, more significantly, cement in Sarawak. CMS is the sole cement producer in the country’s largest state.

“It is estimated that the project would need up to a million tonnes of cement over the course of the construction of the Pan Borneo Highway [in Sarawak]. So this will increase demand for cement,” said Curtis.

“This demand will not be so visible in 2017, so we will see that impact in our P&L (profit and loss statement) in 2018 onwards,” he said in an interview with The Edge Financial Daily during Maybank Investment Bank’s “Invest Asean” forum in Singapore recently.

A similar view was offered by AmInvestment Bank Bhd. In a research note last month, it said that with mega infrastructure projects such as the Pan Borneo Highway and Sarawak Corridor of Renewable Energy, demand for cement and building materials will increase tremendously and result in higher earnings for CMS.

Last July, a joint venture between CMS’ 51%-owned subsidiary PPES Works (Sarawak) Sdn Bhd and Bina Puri Holdings Bhd’s wholly-owned unit Bina Puri Sdn Bhd secured a RM1.36 billion contract from Lebuhraya Borneo Utara Sdn Bhd, the project delivery partner for the Sarawak portion of the Pan Borneo Highway.

Curtis said the overall infrastructure development activities in Sarawak have been regaining momentum after construction work for the 1,073km highway began.

“We are positioning all our companies to meet this local demand. We expect this year’s profits to recover. If you look at the second half of last year, when our profits returned to normality, you can see what is likely to happen this year,” he said.

CMS’ net profit rose 6.77% to RM160.23 million for the second half of the financial year ended Dec 31, 2016 (2HFY16), from RM150.07 million in 2HFY15. Revenue was down 12.37% to RM806.33 million from RM920.16 million.

For the full FY16, net profit fell 31.82% to RM169.18 million from RM248.15 million in FY15, while revenue declined 13.24% to RM1.55 billion from RM1.79 billion.

Apart from sluggish economic activities in the construction sector, Curtis said the fall in profit was also due to the steep depreciation of the ringgit against the US dollar, which resulted in CMS suffering substantial foreign exchange (forex) losses from its 25%-owned associate OM Materials (Sarawak) Sdn Bhd a ferrosilicon producer.

The forex losses were due to hedging activities under a financing programme to fund a project to ramp up the associate’s production. Ferrosilicon is an additive used to harden steel.

“We have cut off the hedging that we had for the financing of the project, and most of our operating costs, including the power, are in ringgit, but our selling prices are in US dollar,” he said.

“However, if and when the ringgit strengthens against the dollar, there is still enough buffer where we will continue to be profitable. So a strengthening ringgit will not affect our business,” he said, adding that a stronger ringgit will benefit the CMS group as a whole.

Moreover, Curtis said CMS has reduced its US dollar-denominated procurement to limit its forex exposure.

“We used to buy cement and clinker in US dollars [but] we are now fully self-sufficient in cement production in the state and clinker,” he said.

CMS’ share price rose one sen or 0.22% to RM4.47 last Friday, giving the group a market capitalisation of RM4.8 billion.

This article first appeared in The Edge Financial Daily, on April 25, 2017.

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