RAM Ratings upgrades Cahya Mata Sarawak’s rating to A1

Published on 05 April 2012

RAM Ratings has upgraded the rating of Cahya Mata Sarawak Berhad’s (“CMS” or “the Group”) RM399.6 million Serial Bonds and the Conditional Payment Obligations (“CPOs”) of the Facilitator Bank (collectively, “the Repackaged CMS Income Securities”), from A2 to A1; the rating has a stable outlook. Under the transaction structure, CMS assumes the risk of non-payment of the CPOs by the Facilitator Bank. The rating of the Repackaged CMS Income Securities is therefore premised on the Group’s credit strength. CMS is involved in cement manufacturing, construction, quarry operations and property development.

The rating upgrade is premised on the sustained improvement in CMS’s financial results over the past 5 years. Backed by its strong market position in Sarawak’s cement-manufacturing sector, revenue increased from RM846.5 million in FYE 31 December 2007 (“FY Dec 2007”) to RM1.0 billion in FY Dec 2011 (unaudited), translating into respective operating profits before depreciation, interest and tax of RM44.5 million and RM195.1 million. The Group’s performance will be further lifted by the acquisition of profitable entities, i.e. CMS Roads Sdn Bhd and CMS Pavement Tech Sdn Bhd in May 2011, along with the benefits from the upgrading of CMS’s integrated cement-manufacturing business.

The better results were also accompanied by stronger debt-protection metrics and a deleveraged balance sheet. Notably, CMS’s gearing ratio eased from 0.38 times as at end-FY Dec 2007 to 0.13 times as at end-FY Dec 2011; its funds from operations (“FFO”) debt coverage surged from 0.03 to 0.91 times over the same period. CMS also boasts a strong liquidity position – featuring RM222.9 million of cash and bank balances and RM516.1 million of investment securities against RM215.8 million of debts as at end-December 2011.

Going forward, the Group’s healthy financial profile is envisaged to remain largely intact. Even after factoring in CMS’s equity injection for its new business venture, i.e. a 20%-stake in a joint venture with OM Holdings Ltd for the production of ferro-alloys (ferro silicon and silico manganese), the Group’s gearing ratio is still envisaged to stay below 0.2 times while its FFO debt coverage should approximate 0.6 times over the next 2 years – considered above-average relative to its similarly rated peers. The rating upgrade also takes into consideration the better showing of the Group’s key divisions, including cement manufacturing and construction, which have outperformed our sensitised-case projections.

CMS recently announced the abortion of its plan to jointly develop a USD2 billion aluminium smelter plant with Rio Tinto Aluminium Ltd. While this will preserve the Group’s coffers, we expect CMS to embark on new projects under the Sarawak Corridor of Renewable Energy and also expand its current operations, albeit at a measured pace. “We believe that CMS’s current robust balance sheet and strong liquidity profile provide sufficient headroom for such initiatives,” notes Shahina Azura Halip, RAM Ratings’ Head of Real Estate and Construction Ratings.

The rating nonetheless, is moderated by the Group’s exposure to geographical-concentration risk as most of its businesses are located in Sarawak. CMS is also susceptible to the cyclical natures of the construction and property sectors.

Media contact
Yong Keck Phin
(603) 7628 1183
keckphin@ram.com.my