Cahya Mata Sarawak Bhd
(April 3, RM4.70)
Upgrade to buy from hold with a target price (TP) of RM5.15: CMS has entered into a conditional share purchase agreement with the Sarawak government to acquire a 50% stake in Sacofa Sdn Bhd for RM186.8 million cash. Apart from the state government (70%), other current shareholders of Sacofa include Celcom Axiata Bhd (15%), Sarawak Information Systems Sdn Bhd (8%) and Yayasan Sarawak (7%).

Sacofa is a tower infrastructure and telecommunication service provider based in Sarawak. Its key assets are: (i) approximately 640 telco towers; (ii) 1,800km of on-land fibre-optic trunk network spanning major cities in Sarawak; and (iii) a 950km submarine cable system link to Peninsular Malaysia.

This deal roughly values Sacofa at 7.2 times historical price-earnings ratio (PER) and 1.1 times historical price-to-book value (P/BV), which we think is still fairly attractive despite the smaller geographical footprint and lack of board control (CMS can nominate only four out of 10 directors). For comparison, the closest Malaysia-listed peer such as OCK Group Bhd is trading at 15 times financial year 2015 (FY15) PER, while most Indonesian tower companies are trading at about 20 times FY15 PER.

We expect this acquisition to be completed by the second half of 2015 and contribute to CMS earnings starting FY16. We lift our FY16/FY17 earnings per share forecast by 13%.

Following the earnings upgrade, we raise our sum-of-parts-based TP to RM5.15, implying 14.8 times FY16 PER (ex-net cash) and 2.2 times FY16 P/BV. We continue to like CMS as a proxy for the robust infrastructure development activities in Sarawak. —  AllianceDBS Research, April 3

This article first appeared in The Edge Financial Daily, on April 6, 2015.