This article first appeared in The Edge Malaysia Weekly, on January 18 - 24, 2016

CAHYA Mata Sarawak Bhd’s (CMS) earnings could get a big boost from the construction of the 1,089km stretch of the Pan Borneo Highway in Sarawak — linking Telok Melano to Merapok — as the diversified group is the largest supplier of aggregate and other construction materials such as cement and premix in the state.

Aggregate and cement are used to make concrete in the building of roads, among others.

While the entire Pan Borneo Highway’s cost is pegged at RM27 billion, the Sarawak portion could cost about RM16 billion, according to analysts. With CMS likely to take the lion’s share of the aggregate, premix and cement contracts, the impact on the company’s earnings is likely to be “substantial”, says an equity analyst.

CMS managing director Datuk Richard Curtis declines to speak to The Edge on the benefits the highway project will bring the company. “At this stage, there is so much that is still being finalised pertaining to the Pan Borneo Highway. I really have nothing to add to what has been [reported] in the media,” he says via SMS, when contacted.

To recap, CMS’ aggregate, granite and microtonalite businesses are parked under wholly owned CMS Quarries Sdn Bhd and 60%-controlled CMS Penkuari Sdn Bhd. The two companies operate five quarries in Stabar, Penkuari, Akud, Sebuyau and Sibanyis with a combined annual rated capacity of 3.15 million tonnes per annum.

According to a senior executive of a construction firm, about 50% of the RM16 billion highway cost could be for building materials such as sand, cement, aggregate and steel bars. He estimates another 20% will go to machinery and the remaining 30% to labour cost.

“But the quanta may vary, depending on factors such as the elevation of the road and the number of bridges,” the executive says.

Another construction industry player expects the material cost to make up 70% of the total cost. “You need to realise that many areas in Sarawak have peat soil, so it will need a lot of earth to prevent sinking. Therefore, the material cost may be higher,” he says.

Be it 50% or 70% (RM8 billion or RM11.2 billion) of the total cost, considering CMS is the only major producer of aggregate, cement and steel bars in Sarawak, it is likely to be a key beneficiary of the highway project.

While the quantum of the increase in CMS’ bottom line is still unclear, the equity analyst says its shares rallied last year on expectations of brighter prospects with the highway project. The stock hit a record high of RM5.84 in end-July last year, gaining 46% since the beginning of 2015. It closed at RM5.09 last Friday, giving the company a market capitalisation of RM5.47 billion.

Some analysts have already started factoring in the higher earnings for CMS. For the nine months ended Sept 30, 2015, the company posted a net profit of RM163.56 million on revenue of RM1.28 billion. Earnings per share (EPS) came to 15.41 sen.

Taking the three quarters’ results and annualising them, net profit for FY2015 will be RM218.08 million on RM1.71 billion revenue.

In a report late last year, Alliance Research forecasts that CMS will register a net profit of RM208 million on RM1.71 million in revenue in FY2015. For FY2016, the research house expects the net profit to increase more than 50% to RM312 million on revenue of close to RM2 billion and an EPS of 30.1 sen.

It is worth noting that the report also took into account that CMS would raise its cement price by 4.6% on average starting this month, due to the costlier raw materials such as clinker, gypsum and coal.

“Given the strong cement demand as well as CMS’ unique position as the sole cement producer in Sarawak, we believe there will be very little competition and/or pricing pressure affecting this price hike (unlike its peers in the peninsula). CMS had successfully hiked cement prices by 5% to 9% in early 2014,” says Alliance Research.

A check on CMS’ nine-month financial results reveals that cement and construction materials accounted for 74.4% or RM952.09 million of the company’s RM1.28 billion revenue and 81.6% or RM162.02 million of its pre-tax profit.

A windfall in the form of the Pan Borneo Highway project should augur well for CMS’ shareholders. The company’s largest shareholder is the family of the Yang di-Pertua Negeri of Sarawak Tun Abdul Taib Mahmud, with more than 50% equity interest. The other substantial shareholder is Sarawak Economic Development Corporation, with a 7.78% stake.

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