Thursday 28 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on December 6, 2021 - December 12, 2021

A stronger set of earnings, coupled with a commitment to strengthen corporate governance, has earned some brownie points for conglomerate Cahya Mata Sarawak Bhd (CMS), with analysts at two brokerages — RHB Research and Maybank IB Research — upgrading the stock from “neutral” or “hold” to “buy”.

Moreover, the imminent Sarawak state elections on Dec 18 are expected to boost CMS’ future prospects, given the group’s history of project job wins from the state government.

The family of Sarawak state governor Tun Pehin Sri Abdul Taib Mahmud is CMS’ largest shareholder, controlling a 22.9% stake, while Lembaga Tabung Haji has 7.6%, followed by the Sarawak Economic Development Corp with 5.7% and the Employees Provident Fund with 4.95%.

Last month, CMS reported that it had more than doubled its net profit for the nine-month period ended Sept 30, 2021 (9MFY2021), to RM179.06 million from RM80.7 million in 9MFY2020 mainly because of better performance from its cement, trading and property development businesses as well as a gain on disposal of shares held in Kenanga Investment Bank Bhd. Revenue for the period grew 3.1% to RM572.93million.

RHB Research, which upgraded its call on CMS to “buy”, with a target price of RM1.70 — a 34% upside to its closing price of RM1.27 last Thursday — explains that its upgrade is premised on an improved business backdrop for CMS coming out of the pandemic.

“Looking ahead, a broad improvement in operating conditions post-lockdown should spur the quarter-on-quarter recovery of its business divisions, while a positive outcome to the forthcoming Sarawak elections alongside the sustained rollout of state development projects is seen as supportive of the group’s 2022 prospects,” the firm says.

Maybank IB Research, which upgraded the stock from “hold” to “buy”, with a target price of RM1.68, says it views positively the measures being put in place to strengthen the risk management framework of the group, following findings made by KPMG Management and Risk Consulting Sdn Bhd in relation to possible financial mismanagement by an executive.

“Moving forward, restoring confidence in governance is vital, in our view,” the brokerage says.

TA Securities, in its note on CMS, says it believes OM Materials (Sarawak) Sdn Bhd — a 25% associate of the group that operates a manganese alloy smelter in the Samalaju Industrial Park — will remain its core earnings driver in the upcoming quarter.

“This is as the average selling prices for ferrosilicon and manganese are still staying at an elevated level. We are delighted that the independent review by KPMG has finally been completed as it will help improve sentiment on the stock,” the group says.

TA has a “buy” call on CMS, with a target price of RM1.76.

Key findings from special review report

The release of key findings by KPMG in its special review report comes after CMS suspended its chief financial officer Syed Hizam Alsagoff in May, following an allegation of possible financial mismanagement in relation to the company’s investments and operations.

The special review by KPMG — on certain projects in associates, subsdiaries and joint ventures of CMS from 2011 to 2020 — found that there were gaps in the contract management and bidding processes, which contributed to a project’s losses. In addition, there was a lack of monitoring on hedging transactions by the board of an associate company for a certain project, which led to losses owing to adverse currency exchange movements.

There was also a lack of due diligence and stakeholder management on the joint venture partners’ risks of a project, and the reporting structures by management to the board were not adhered to and complied with in a project. The realised losses incurred had been accounted for in the past financial results of the group.

Based on the key findings, CMS has appointed a lawyer to look at the various issues that have arisen and to advise the group on all legal issues, in particular, in relation to the conduct of senior management at the material time.

The group also unveiled its plans to enhance corporate governance and management accountability as well as to proactively raise its risk management capability. This includes strengthening its risk oversight at board level on enterprise material risk, the setting-up of an investment committee chaired by the group managing director to review and recommend all proposals and investments to the board, and the setting-up of an independent group risk division to drive risk management throughout the company.

CMS also vowed to strengthen accountability and integrity at all levels of senior management to further build a culture of governance and growth across the group.

All eyes on Sarawak state elections

As Sarawakians go to the polls on Dec 18, it remains to be seen whether the ruling Gabungan Parti Sarawak will remain in power, or if the opposition can upset the form book and spring a major surprise.

UOB Kay Hian says while CMS will be in the spotlight ahead of the election, exuberance among investors may be short-lived as sentiment remains tepid due to rising inflation and uncertain global economic growth.

“Post-election, we expect CMS’ valuation to revert to its fundamentals based on Sarawak’s economic activities to sustain earnings. In Budget 2022, the government has allocated RM4.6 billion as development expenditure for Sarawak [bringing the combined development allocation from both federal and state funds to RM12 billion].

“Hence, Sarawak will be able to spend RM1 billion a month for the state’s development in 2022. CMS is a prime beneficiary as it would be a potential contractor and key supplier of raw materials for the upcoming mega projects,” the firm says.

UOB has a “hold” call on CMS, with a target price of RM1.44.

Another development that will be closely watched pertains to Sacofa Sdn Bhd, CMS’s 50%-owned telecommunications infrastructure and services arm.

“To recap, the Sarawak state government has given Sacofa a 20-year concession until Dec 31, 2021, to build, manage, lease and maintain the telecommunication towers in the state.

“Given that Sacofa has been providing strong and stable recurring income to the group, we believe the expiry of concession in Sacofa remains a near-term concern to the group,” says TA Securities.

Year to date, CMS shares have declined 40% to RM1.27 last Thursday, valuing the group at RM1.36 billion.

 

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