Published on 19 May 2015
RAM Ratings has reaffirmed Cahya Mata Sarawak Berhad’s (CMS or the Group) AA3/Stable/P1 corporate credit ratings.
The ratings reflect CMS’s dominant market position as
the sole cement manufacturer in Sarawak. Backed by its strong
bargaining power and vertically integrated operations, the Group’s
cement operations are highly profitable. As one of the key construction
material suppliers in Sarawak, the Group is well poised to benefit from
the State’s booming construction sector, which is largely driven by the
development of the Sarawak Corridor of Renewable Energy (SCORE).
RAM views CMS’s somewhat diversified sources of
income favourably. Apart from cement production, the Group derives a
sizeable income from its construction material and trading as well as
construction and road maintenance divisions. To a smaller extent, it
enjoys contributions from its investment in the Samalaju Industrial Park
(SIP) and property divisions. Going forward, CMS will add the provision
of telecommunication infrastructure and production of ferrosilicon and
manganese alloys to its stable. In our view, apart from contributing
positively to its earnings, the Group’s income diversity makes it less
vulnerable to the underperformance of any one key division.
The ratings are also supported by the Group’s
superior financial profile. As at end-December 2014, its borrowings
stayed flat at around RM100 million, which translated into a strong
gearing level of 0.05 times. With a cash hoard of close to RM830
million, CMS remained in a comfortable net cash position. The low debt
level, coupled with a healthy cash-generating profile, resulted in the
Group’s funds from operations debt coverage ratio coming in at 2.57
times in FY Dec 2014 (FY Dec 2013: 2.72 times). Moving forward,
notwithstanding the use of borrowings to fund the recently announced
acquisition of Sacofa Sdn Bhd, we expect CMS’s balance sheet and
debt-protection metrics to stay healthy.
Moderating the ratings is the Group’s vulnerability
to geographical concentration risk. Given that its entire business
operation is based in Sarawak, CMS’s performance is heavily dependent on
economic conditions in the State. The Group’s performance is expected
to soften should Sarawak’s economy experience a slowdown or in the event
of setbacks in the development of the SCORE. Moreover, as the Group’s
products are targeted at the property and construction industries, it
also has to contend with the cyclical nature of these sectors.
Elsewhere, being majority owned by the family of
Sarawak’s Yang di-Pertua Negeri, Tun Abdul Taib Mahmud (formerly the
Chief Minister of Sarawak), the Group is exposed to some degree of
political risk. Any change in the State’s political landscape could have
an adverse impact on the Group. That said, we draw comfort from the
Group’s already-entrenched market position and its crucial role in
Sarawak’s overall economic development. At present, members of Abdul
Taib’s family hold a 41%-stake in CMS.
Starting off as a cement manufacturer in Sarawak, CMS
has since expanded into various other businesses including trading in
construction materials, construction and road maintenance, property
development, smelting, education and financial services. The Group is
currently a major private-sector player in Sarawak and the sole cement
and clinker manufacturer in the State.
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