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This article first appeared in The Edge Malaysia Weekly on September 18, 2017 - September 24, 2017

IT has not been plain sailing since Cahya Mata Sarawak Bhd (CMS) took up a 20% stake in OM Materials (Sarawak) Sdn Bhd, the US$500 million manganese and ferrosilicon smelting plant in Samalaju Industrial Park, Bintulu driven by Australia’s OM Holdings Ltd, in 2011. It acquired an additional 5% stake in 2015 for US$18.45 million.

But this investment has dragged down CMS’ earnings thus far.

In 2016, the group recorded RM35.17 million share of losses from associates largely due to currency hedging losses. Hedging was a condition of the smelting plant’s financing.

That contributed to a 32% year-on-year drop in net profit to RM169.18 million on the back of a 13.2% y-o-y decrease in revenue to RM1.55 billion in the financial year ended  Dec 31, 2016 (FY2016).

“Last year, the plant got caught by very low commodity prices and the collapse of the ringgit. So we took a big financial hit,” says CMS group managing director Datuk Richard Curtis.

“If we had operated at full production at the time, we would have broken even,” he says. “Big projects always have these stumbles, particularly in the beginning, but we’re getting through the woods now.”

In June, OM Materials turned profitable. By July, it had fired up 14 out of 16 furnaces.

While the smelting plant was loss-making in 1HFY2017 and will likely record a loss for the whole year, Curtis expects it to break even or record a small profit in the second half.

He believes that the project, alongside CMS’ investment in Malaysian Phosphate Additives Sdn Bhd’s integrated phosphate complex in Bintulu, will be a game changer for the group’s profits.

“Those two businesses alone should be able to double our profits in five to six years,” says Curtis, adding that this is before looking at brownfield expansion plans as both plants have additional space for further phases.

“Last year, we did roughly RM170 million [in net profit], so these two plants should easily deliver another RM170 million. That may take five to six years, but we’re laying the foundations now.”

Part of the structural advantage of OM Materials is that 51% of the manufacturing cost is power, and Sarawak is the lowest-cost energy producer in the region, Curtis says. Additionally, the product variations diversify its market exposure.

That will drive CMS’ earnings rebound this year. For the first six months of FY2017, its cumulative net profit surged nearly tenfold to RM89.39 million despite a 10% y-o-y revenue drop, thanks to lower losses from associate investments.

“As we ramped up [at OM Materials], the losses fell,” he says. “We are definitely on a solid upward trend again and typically in Sarawak, the second half of the year is better than the first.”

That said, he says FY2017 earnings are unlikely to top that of FY2015 when it posted a net profit of RM248.15 million.

Delivering an earnings rebound is high on Curtis’ agenda this year as he bows out on Dec 31. Another target is to ensure a smooth handover.

“My mandate when I came to CMS was really quite simple — make CMS profitable, develop Sarawak and do it with integrity and professionalism, which I think we’ve done,” he says.

CMS is pursuing an “edging strategy” for its core businesses — finding opportunities within existing areas instead of exploring new ventures. “I’m beginning to see a positive (earnings) impact flowing through from these initiatives since last year.”

An earnings rebound may, in turn, catalyse CMS’ share price. Last Thursday, the counter closed at RM4.10, up 2.5% year to date after touching an eight-month low of RM3.69 per share at end-July after the succession plan was announced.

Curtis opines that the lacklustre share price is due to concerns over CMS’ associates and its concession for state roads maintenance, which  is up for review by the end of this year. He believes that it will be renewed, although the state has yet to confirm.

 

 

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