Excitement in the pipeline for Sarawak’s Cahya Mata?

Excitement in the pipeline for Sarawak’s Cahya Mata?
Business & Markets 2014
Written by Maybank IB Research
Friday, 21 March 2014 11:07

Cahya Mata Sarawak Bhd
(March 20, RM9.14)
Maintain buy with target price of RM10.50: Cahya Mata’s board of directors recently approved its second one million tonne per annum cement grinding plant that will be located next to its clinker plant in Mambong, Sarawak. Construction will start in June this year and it is expected to be completed by end-2015. Out of the RM180 million total construction cost, RM150 million will be funded via borrowings. Cahya Mata is in the process of securing financing and shortlisting the engineering-procurement-construction (EPC) contractor for the plant.

The company’s current cement plant utilisation is above 90%. The new plant will raise its cement grinding capacity to 2.75 million tonnes (+57%), from 1.75 million tonnes, in 2016 in order to cater to the rising demand for cement in the state from the Sarawak corridor of renewable energy (Score) development and urbanisation of Sarawak.

The five power plant projects in the pipeline in Sarawak will also boost demand for cement.

Cahya Mata is also looking to expand its cement export business, having already started small-scale exports to Kalimantan and Sabah.

Construction of OM Materials (Sarawak) Sdn Bhd’s (OMS, in which Cahya Mata has a 20% stake) ferrosillicon alloy smelting plant (Phase 1) is expected to be completed on time and the plant will begin operations in the third quarter of 2014.

The majority of Cahya Mata’s property earnings in the past were from land sales as its property development arm was mainly involved in low-cost housing projects with low margins.

Cahya Mata restructured its property division’s management in 2012 to 2013, which included the appointment of its current executive director and chief executive officer Vincent Kueh Hoi Chuang. Kueh was previoulsy executive director of Naim Holdings Bhd’s property development arm and has extensive experience in both the property and construction sectors, having been responsible for several of Naim’s flagship property projects in Sarawak.

With the new management, Cahya Mata plans to gradually increase earnings contribution from property sales going forward. It is developing a 283.5-acre (114.7ha) tract in Kuching in 2013 to 2018.

We introduce our 2016 earnings forecast by leveraging on the company’s: (i) growing earnings contribution from the ferrosillicon alloy smelting plant as it ramps up to full production by the first half of financial year 2015 ending Dec 31; (ii) new cement capacity (+57%) in 2016; and (iii) stable earnings contribution from the other divisions. We forecast Cahya Mata’s 2014, 2015 and 2016 net profits growing at 19%, 21% and 22% year-on-year respectively.

Our previous discounted sum-of-parts (SOP) valuation does not fully reflect new earnings potential from its expansion plans and strategic investments that will start contributing after 2015. With its strengthening prospect, we believe that our target price should no longer be pegged to a discount to its SOP.

We raise our target price to RM10.50 after removing the 20% discount previously accorded. Potential acquisitions and new investments will further rerate the stock. — Maybank IB Research, March 20



This article first appeared in The Edge Financial Daily, on March 21, 2014.