Published on 25 Aug 2023.
RAM Ratings has reinstated the outlook on Cahya Mata Sarawak Berhad’s (Cahya Mata or the Group) long-term ratings to stable from positive while maintaining the Group’s corporate credit ratings and RM2.0 bil Islamic MTN Programme (2017/2037) rating at AA3/P1 and AA3, respectively.
The shift in outlook stems from the temporary stoppage of electricity supply on 10 July 2023 to Cahya Mata Phosphates Industries Sdn Bhd, a division of the Group engaged in phosphates manufacturing. The disruption arose from an ongoing legal dispute with Syarikat SESCO Berhad (SESCO) over the terms of the power purchase agreement (PPA). The Group is currently engaged in arbitration proceedings with the Asian International Arbitration Centre over the matter while exploring other legal avenues. The positive outlook had been based on our expectation of Cahya Mata Phosphates transitioning into full commercial operations and becoming a substantial earnings contributor from fiscal 2024. The division was envisaged to diversify the Group away from its construction-centric businesses and further strengthen its financial profile. Uncertainty on the timeline for resolving the dispute makes it difficult to determine when electricity supply will resume and commercial operations to start.
While we remain positive about the earnings potential of the phosphates division, the continued deferral of commercial operations will prolong its losses and possibly result in impairments. Depending on the outcome of the dispute resolution, the Group may be liable for one-off costs and penalties payable to SESCO in excess of the RM266 mil recognised as a contingent liability as at end-December 2022. The segment’s profitability may change according to the electricity tariff charged either under the PPA or industrial rates. However, once these challenges are addressed, the earnings potential of the phosphates division could be fully realised.
Notwithstanding the financial impact, Cahya Mata’s credit profile continues to be supported by its strong foothold in Sarawak’s construction industry, particularly the cement sector, and its robust balance sheet. As at end-March 2023, the Group was in a net cash position with cash and bank balances of RM817.48 mil and gearing of 0.16 times. Its annualised funds from operations debt cover for 1Q FY Dec 2023 was 0.33 times.
Cahya Mata recently announced a RM750 mil investment in a new clinker plant for its cement division, the construction of which is expected to commence next year. Although the Group’s debt level may rise over the medium term, the new plant could lower manufacturing costs and bolster its competitive positioning in Sarawak. We will reassess the overall credit impact, including any potential positive movement, likely when the dispute with SESCO is settled.
(603) 3385 2510
Thong Mun Wai
(603) 3385 2522
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
Published by RAM Rating Services Berhad
© Copyright 2023 by RAM Rating Services Berhad
Ratings on Cahya Mata Sarawak Berhad