Published on 23 Jan 2020.
RAM Ratings has reaffirmed the AA3/Stable rating of Cahya Mata Sarawak Berhad’s (CMS or the Group) RM2.0 bil Islamic MTN Programme (2017/2037), as well as the Group’s AA3/Stable/P1 corporate credit ratings. The reaffirmation is premised on CMS’s solid business profile as the sole cement manufacturer and among the key construction material providers in Sarawak (or the State). The Group is well poised to benefit from a more development-centric state budget for 2020, despite greater competitive pressure in construction and road maintenance. In the medium term, CMS is also likely to gain from the growing momentum of the State’s development activities. The reaffirmation of the ratings also reflects the Group’s conservative balance sheet and healthy cashflow debt coverage over the next three years.
The ongoing development of the Sarawak Corridor of Renewable Energy (SCORE), along with various road and construction projects in the State such as the Pan Borneo Highway, remains key to CMS’s operating performance. The Group’s revenue advanced to RM1.68 bil in FY Dec 2018 (+8.7%) and RM1.28 bil in 9M FY Dec 2019 (+5.7%). Nonetheless, higher input and maintenance costs and weaker construction earnings had crimped its operating margins. The Group’s share of profits from its investments boosted its pre-tax profit by 15.9% to RM372.32 mil in fiscal 2018. On the other hand, the poorer earnings of an associate shaved 20.2% off its pre-tax profit to RM230.85 mil in 9M fiscal 2019. Notably, CMS enjoys some degree of earnings diversity; contributions from its three core segments are fairly well distributed.
As Sarawak’s main provider of construction materials and one of the State’s larger contractors, CMS is poised to benefit from the anticipated acceleration in construction activity over the medium term. The State’s budget remains focused on development, having allocated RM9.07 bil in 2019 and RM9.89 bil in 2020 for such expenditure.
Despite a higher debt level of RM800.94 mil as at end-September 2019 (end-December 2018: RM617.10 mil), CMS maintained its sturdy balance sheet. The Group’s gearing and net gearing ratios stood at a respective 0.25 and 0.07 times as at the same date. At the same time, the Group enjoys a strong liquidity position, with RM687.55 mil of cash equivalents (including money-market instruments) against RM51.22 mil of short-term debts. Its resiliently healthy cashflow resulted in a robust annualised funds from operations (FFO) debt coverage ratio of 0.29 times in 9M FY Dec 2019. We expect its gearing ratio to stay below 0.30 times over the next two to three years while its FFO debt coverage is likely to range around 0.25-0.30 times.
CMS is subject to geographical concentration risk as all its operations are clustered within Sarawak, thereby rendering it highly dependent on the State’s economic well-being. As its businesses are primarily related to the construction and property sectors, the Group is vulnerable to the cyclicality of the State’s economy. Meanwhile, CMS’s commodities-based investments in the SCORE also expose it to execution risk and volatile commodity prices.
As the family of Sarawak’s governor, Tun Haji Abdul Taib Mahmud (also the State’s former chief minister), collectively owns 32.89% of CMS, the Group is exposed to some degree of political risk. To reduce its affiliation with the previous chief minister, CMS has instituted significant changes to its board and management. While CMS’s dominance may be affected by drastic changes in the State’s political landscape, we derive comfort from the Group’s already entrenched market position in the supply of construction materials.
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Ratings on Cahya Mata Sarawak Berhad