Published on 24 Jan 2022.
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 reflects our expectation that CMS’s operating performance will gradually improve as it directly benefits from the pick-up in Sarawak’s construction activity. Accordingly, the Group’s financial profile, particularly its cashflow debt coverage, is anticipated to improve steadily in the immediate two years to stay commensurate with its ratings.
In the past year, CMS made major changes to the composition of its board and revamped its senior management lineup. This follows allegations of and investigations into governance-related issues involving a key board member and senior management personnel. While the probe into the board member found the allegations to be without basis, a special review on the financial management of past investments revealed governance gaps. These events raise concerns over the Group’s governance risks and potential negative investor and market perceptions.
We recognise positive remedial measures taken by the board to strengthen the Group’s internal controls and risk management. Dato Sri Sulaiman Abdul Rahman B Abdul Taib, who helmed CMS from 1995 to 2008, now heads the heavily revamped key management team as Group Managing Director. The new management is focused on fortifying core businesses and steadying the Group as it emerges from the COVID-19 pandemic.
The protracted pandemic and movement controls had greatly disrupted the progress and rollout of projects in the construction sector. As the sole cement manufacturer and key construction materials supplier in Sarawak, CMS was consequently severely impacted. Its top line fell to RM739.66 mil in FY Dec 2020, remaining subdued at RM572.93 mil for 9M FY Dec 2021 (FY Dec 2019: RM1,085.81 mil). The Group’s pre-tax profit of RM225.44 mil for fiscal 2020 (fiscal 2019: RM247.90 mil) would have been significantly lower without one-off gains and impairments that collectively lifted its bottom line by RM82.88 mil. Pre-tax profit for 9M fiscal 2021 came in at RM202.11 mil, also benefiting from a RM28.52 mil gain on the disposal of quoted shares and a strong share of earnings from an associate.
Progressive improvement in CMS’s operational performance and earnings will hinge on the recovery of the construction sector and the state’s rollout of major projects. Sarawak remains development focused, with the construction component of the GDP forecasted to rebound by 7.5% in 2022 (2020: -8.8%; 2021: 3.6% estimate). The Group enjoys a dominant market position in Sarawak’s cement industry, its considerable excess capacity adequate to support the state’s future cement requirements. This coupled with an established state-wide distribution network positions the Group well to compete against potential new industry entrants. CMS derives some degree of earnings diversity from its three core segments, although these are largely related to the construction industry.
CMS’s balance sheet remained robust despite debts rising to RM934.53 mil as at end-September 2021 (end-December 2020: RM893.02 mil) mainly to fund capital expenditure for its cement division and new phosphate plant. Gearing and net gearing (including money market instruments) were a respective 0.29 times and 0.13 times on the same date (end-December 2020: 0.30 times and 0.19 times). We expect the Group’s balance sheet to stay healthy in the immediate two years with gearing and net gearing ratios of about 0.3 times and 0.2 times, respectively.
Given pressure on cashflow generation stemming from the prolonged pandemic and increased debts, the Group’s funds from operations (FFO) debt coverage weakened from 0.17 times in FY Dec 2020 to 0.14 times in 9M FY Dec 2021, leaving little headroom for further debt expansion. We estimate FFO debt coverage, adjusted to include contributions from key joint ventures and an associate, to improve from about 0.20 times in fiscal 2021 to above 0.25 times in fiscal 2023.
CMS’s heavy reliance on Sarawak’s economy moderates its ratings. It lacks geographical diversification and is exposed to the cyclical nature of its core businesses in the construction and property sectors. The Group also faces increasingly stiffer competition for contracts in construction and road maintenance. To this end, CMS has realigned and strengthened its collaboration with Sarawak Economic Development Corporation which is anticipated to yield more contracts. The Group’s commodities-based investments in Sarawak Corridor of Renewable Energy expose it to execution risk and commodity price volatility.
The family of Sarawak’s governor holds a substantial stake in the Group. Following recent changes in the boardroom and senior management lineup, greater influence from the major shareholder could raise further governance or reputational issues which could work against efforts to secure contracts. This risk is alleviated to some extent by CMS’s entrenched market position and proven track record, the infusion of strong independent board members and the commitment to transparency and governance demonstrated by the new senior management team, including open disclosures in recent announcements.
(603) 3385 2510
Thong Mun Wai
(603) 3385 2522
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