Published on 27 Jan 2021.
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 strong business profile as the sole cement manufacturer and among the key construction material providers in Sarawak (or the State). Although earnings and debt coverage metrics are expected to weaken for the immediate term, they are envisaged to gradually improve as the Group strengthens its market positioning and benefit from the continued roll out of more infrastructure projects in the State.
Notwithstanding CMS’ sustained top line of RM1.71 bil in FY Dec 2019, pre-tax earnings took a dive to RM247.90 mil (FY Dec 2018: RM1.68 bil and RM372.32 mil, respectively) due to higher costs in key divisions and near halving of associates’ contribution. Amid COVID-19 challenges in 9M FY Dec 2020, revenue and pre-tax profit shrank a respective 31.7% and 43.0% to RM872.52 mil and RM131.53 mil. Work stoppage for the construction and property sectors took a toll on top line, together with relatively high fixed costs had eroded its bottom line. As at end-September 2020, the Group’s debts continued to climb to RM888.28 mil (end-December 2019: RM803.49 mil), largely to fund its investments into a subsidiary’s phosphate manufacturing plant. CMS’ balance sheet remains sturdy, however, with gearing and net gearing ratios of 0.28 and 0.12 times, respectively. Given weaker earnings for the latest period, annualised funds from operations debt coverage came in at 0.19 times (FY Dec 2019: 0.26 times).
With rising competition for construction related jobs, CMS is forming a stronger collaboration with Sarawak Economic Development Corporation (SEDC). On 2 October 2020, the Group divested 2% interest in key joint venture entities involved in quarrying, production of asphalt, road maintenance and construction, leading to the state agency gaining 51% control of the entities. Although earnings from these entities are deconsolidated and CMS will only account for the share of their profits, the expected greater involvement from SEDC strategically positions these companies to capture more contracts and enlarge their business. The Group hopes to gain from a larger pie to offset the dilution from a smaller stake. Further, the State agency is a 5.7% shareholder in the Group with its Chairman a member of the Board of CMS.
Over the medium term, CMS’ earnings are expected to gradually improve. We envisage the Group’s cashflow debt coverage will remain supportive of the ratings; operating cashflow debt coverage (including dividends) is estimated to improve to about 0.17 times in the immediate two years, while the same measure on a net debt basis is likely to stay above 0.30 times. CMS’ balance sheet is anticipated to remain robust.
Other than CMS’ strong foothold in Sarawak’s cement industry and its healthy financial profile, the Group’s ratings continue to be upheld by the State’s upbeat construction sector, with federal and state budgets allocating RM10.8 bil for development in 2021 (2020: RM11.0 bil). CMS also derives some degree of earnings diversity from its three core segments, although mostly related to the construction industry.
CMS’ ratings is moderated by its heavy reliance on Sarawak’s economy, given its lack of geographical diversification, and cyclical nature of its core businesses in construction and property sectors. The Group is also exposed to some degree of political risk due to the substantial stake in the Group held by the family of Sarawak’s governor. Nonetheless, CMS has made significant changes to its top management and board members to reduce its affiliation to the family of the State’s governor. Elsewhere, the Group’s commodities-based investments in the SCORE expose it to execution risk and volatile commodity prices.
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Ratings on Cahya Mata Sarawak Berhad