RAM Ratings assigns AA3/Stable rating to Cahya Mata Sarawak's proposed Islamic MTN programme
RAM Ratings has assigned an AA3/Stable rating to Cahya Mata Sarawak Berhad’s (CMS) proposed RM 2.0 billion Islamic Medium Term Notes Programme (2017/2037). RAM also reaffirmed the AA3/Stable/P1 corporate credit ratings of CMS.
At the same time, RAM Ratings has withdrawn the rating assigned to CMS’s proposed RM 1.0 billion Sukuk Ijarah programme (2016/2036) which has not been issued. The ratings are supported by CMS’s strong business profile as the sole cement manufacturer in Sarawak.
CMS’ somewhat diversified sources of income are also viewed favourably, albeit mostly being related to the construction sector. In the last two years, CMS has been enjoying strong growth in profitability from its construction material and trading as well as construction and road maintenance divisions. Backed by strong market position and vertically integrated operations, the Group is expected to benefit from the development of the Sarawak Corridor of Renewable Energy (SCORE) initiative as well as the Pan Borneo Highway project when it takes off.
The ratings continue to reflect the Group’s superior financial profile. CMS had been able to maintain a net cash position in the past five years despite being actively acquiring new investment assets. CMS’s profit before tax for 9M FY Dec 2016 plunged 40 per cent y-o-y from lower cement sales volume, higher cost of raw materials due to the weaker Ringgit as well as a substantial loss in its share of associate, mainly from 25 per cent-held OM Materials (Sarawak) Sdn Bhd (OMS).
Nevertheless, the Group’s financial position remained robust with a gearing ratio of 0.11 times as at end-September 2016. CMS’s funds from operations (FFO) debt cover also stayed strong at 0.92 times in 9M FY Dec 2016. Including an expected drawdown of RM 500 million Sukuk this year, the Group’s financial profile is expected to remain comparable against AA3 peers. CMS is envisaged to maintain a healthy FFO debt coverage ratio of above 0.30 times and gearing ratio of less than 0.40 times.
Moderating the ratings is the Group’s geographical concentration risk. Given that its entire business operation is based in Sarawak, CMS’s performance is dependent on economic conditions in the State. 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. CMS’s growing investments in commodity processing ventures in Samalaju are also exposed to execution risk and volatile commodity prices.
Elsewhere, being substantially 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 39.6 per cent-stake in CMS.
Established in 1974, CMS is a Sarawak-based conglomerate listed on Bursa Malaysia. Starting off purely as a cement manufacturer, its core businesses now include trading in construction materials, construction and road maintenance and to a smaller extent, property development. CMS is directly involved in the Samalaju Industrial Park (SIP) via the provision of lodging services for the workers of SIP and its investments in a ferrosilicon and manganese smelter project as well as a phosphate plant. The Group is also involved in the development of a new township adjoining SIP. Elsewhere, CMS holds a 50% non-controlling interest in Sacofa Sdn Bhd, a telecommunications infrastructure provider.