TA Sector Research

Cahya Mata Sarawak Berhad - Looking Forward to the New Clinker Plant

sectoranalyst
Publish date: Fri, 08 Dec 2023, 09:46 AM

The traditional core businesses are expected to remain resilient, underpinned by the ongoing local infrastructure projects in Sarawak. The cement division will remain the main earnings driver of the group. Management has reaffirmed its commitment to construct a new clinker plant in Kuching, Sarawak. Meanwhile, the newly acquired Oiltools has emerged as the second-largest earnings contributor in 9MFY23. On the other hand, the legal dispute with Syarikat SESCO Bhd over the power purchase agreement remains. Therefore, we expect the commercial operation of the phosphate plant to be delayed further. Overall, we maintain a Hold call with a lower target price of RM1.11.

The Following Are the Key Takeaways From the 3QFY23 Analyst Briefing:

Cement Division Remains as the Largest Earnings Contributor

For 9MFY23, the cement division remains the largest earnings contributor to the group, accounting for 60.7% of the group's PBT. The group had recently entered into a technical consultancy agreement with Sinoma Industry Engineering (Sinoma) to assess its plan to construct a new clinker line in Kuching, Sarawak, with a 1.9mn tonne annually. On top of that, Sinoma will also help to optimise its existing clinker plant in Sarawak. Based on the indicative timeline, the construction work for the new clinker plant will likely commence on 3Q2024 with a project period of 36 months. The project is estimated to cost about RM750.0mn. Management stated that the new clinker plant will help the group reduce its reliance on imported clinkers.

Meanwhile, the construction materials and trading divisions are expected to benefit from the resilient demand for building materials, thanks to ongoing local infrastructure projects. On the other hand, management revealed that the road maintenance division is expected to perform better in the final quarter due to higher instructed work. Elsewhere, the property division is still mainly focusing on the delivery of housing at Bandar Samariang, Kuching.

Oiltools Has Become the Rising Star

The newly acquired Oiltools has emerged as the second-largest earnings contributor in 9MFY23, accounting for 17.3% of the group's PBT. Recap, the group acquired Oiltools from Scomi Energy Services Bhd last year. Oiltools is principally involved in providing drilling support services and products for the oil and gas industry. Management is confident that Oiltools will be able to deliver stronger earnings performance going forward, underpinned by its healthy outstanding order book. Meanwhile, Oiltools is still actively bidding for more jobs across the globe.

Phosphate to Remain as Earnings Drag

The legal dispute with Syarikat SESCO Bhd over the power purchase agreement remains ongoing. According to the latest filing, the evidentiary hearing has been fixed from 26 August 2024 to 30 August 2024. Therefore, we believe that the phosphate plant's commercial operation is unlikely to occur in the near term.

Forecast

Earnings forecasts for FY23/FY24/FY25 were reduced by 14.5%/6.6%/7.6%, respectively, after taking into account higher loss in the phosphate division.

Valuation

After revising the earnings forecasts, we reduced the target price from RM1.14 to RM1.11/share based on SOP valuation. Maintain a Hold call on the stock.

Source: TA Research - 8 Dec 2023

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