Cahya Mata Sarawak returns to growth path

Cahya Mata Sarawak Bhd (Dec 23, RM3.89)

Maintain buy call with a higher target price of RM4.40: Cahya Mata Sarawak Bhd (CMS) is an excellent proxy for the Sarawak Corridor of Renewable Energy development corridor. Aside from the Pan Borneo Highway that is expected to gain steam moving into 2017, its 50%-owned Sacofa Sdn Bhd may continue to churn decent returns and its 25%-owned OM Materials (Sarawak) Sdn Bhd (OMS) is on the right track to turn around.

CMS is returning to its growth path with two consecutive quarters of improved sales and margins after temporary setbacks earlier this year. Its 40%-owned Malaysian Phosphate Additives Sdn Bhd project is also progressing, with financial closure expected in the next few months.

As the direct proxy for the Sarawak state government, CMS is set to be the prime beneficiary of the Pan Borneo Highway. Aside from the RM1.36 billion roadwork package it won, it also has the upper hand in winning lucrative material supply contracts. As Sarawak’s sole cement manufacturer, CMS would also benefit from the escalating cement demand.

CMS acquired a 50% stake in Sacofa back in April 2015 that turned out to be a value-accretive investment. With exclusive rights to construct, own and manage the communication infrastructure in a state that has the lowest mobile and internet penetration in the country, this associate certainly offers great growth potential for the foreseeable future.

The successful debt restructuring and squaring of its hedging position in the second quarter of 2016 (2Q16) by OMS certainly gives the unit some breathing space. We see gradual improvements in OMS, as the remaining 10 furnaces are set to progressively commission, although a full turnaround is only expected in 3Q17 at the earliest. — RHB Research Institute, Dec 22