CMSB: The Undisputed Child of Sarawak

In year 2019, one listed company in Malaysia has an ambitious 5-year target of reaching RM500mil PATAMI by the end of year 2024.

Its PATAMI in 2019 was just RM160mil, which means it has to grow at a CAGR of at least 25% over 5 years to achieve its target.

It is not an easy task for sure.

However, its highest PATAMI was RM265mil in 2018. This makes its RM500mil target looks a bit more within reach. 

It has 1,074mil of ordinary shares, with no future earning dilution except ESOS at the moment.

If it can achieve RM500mil PATAMI, then its EPS will be 46.5sen. 

If we simply give it a PE ratio of 10x, it will be worth RM4.65.

Now its share price is trading at RM1.30. Is it attractive?

This stock is no other than the heavily government-linked Cahya Mata Sarawak Berhad (CMSB). You can't find any better proxy to Sarawak development than this.

We know that CMSB is owned by the famous "white hair" Taib Mahmud, who is currently the Governor of Sarawak after serving as the Chief Minister of Sarawak for 34 years from 1981 to 2014.

Some investors might be wary of CMSB as it does not seem to be a company with good corporate governance.

However, how did the market value it in the past?

Its highest share price was in mid 2015 at around RM5.80. Its EPS in FY14 and FY15 was 21.4sen and 22.7sen respectively. That was a PE valuation of more than 20x.

Its share price took the first hit in May 2018 when there was a change in federal government in which it plunged from above RM4 to RM2 level.

It got its second hit in Mac 2020 due to the Covid-19 pandemic when it fell from RM2 to RM1.

Its share price recovered back to above RM2 but was hit the third time lucky in May 2021 when its CFO was suspended during the time of jittery market sentiment caused by the Serba Dinamik saga.

Its FY20 EPS ended in Dec20 was 18sen (PATAMI of RM194.7mil). However, it was heavily affected by MCO, huge disposal gain as well as impairment loss.

Its FY21 EPS in Q1 alone was great at 7.32sen but it was also beautified by huge disposal gain.

To me, its FY21's Q2 & Q3 EPS of 4.4sen (PATAMI RM47.4mil) and 5.0sen (PATAMI RM53.9mil) better reflect its true earnings.

Thus, its annualized "true" EPS will be around 20sen and at current share price of RM1.30, its projected PE is just 6.5x.

The table below shows CMSB's past 5 years financial results and financial ratios. It has a dividend policy of at least 30% of PATAMI subject to minimum 2sen per share.

As a state government-linked company, it's expected that the state will "gift" some construction and maintenance contracts to CMSB.

Those contracts were previously given mainly to its two 51% owned subsidiaries CMS Resources Sdn Bhd (construction materials and trading) and PPES Works Sdn Bhd (construction jobs).

The rest of the 49% were owned by Sarawak state government through Sarawak Economic Development Corporation (SEDC).

In Oct 2020, CMSB sold 2% shares of these two companies to SEDC, making them a 49%-owned companies now.

This seems to be a move to strengthen tie with the state government.

Thus, starting from FY20Q4, the revenue from these two companies were no longer registered under CMSB and the profit was recorded as "share of results of joint ventures".

That's the reason for the massive fall of quarterly revenue from about RM400mil previously to RM200mil since FY20Q4.

The 2% disposal has resulted in massive disposal and remeasurement gain of RM162.9mil registered under FY20Q4.

CMSB is quite of a complicated company with lots of businesses. There are share of significant profits from its associates and joint ventures in its quarterly report.

To better understand the company and its financial reports, I'll categorize its business into main business, joint ventures (share of profit from JV) and strategic investment (share of profit from associates).

Main Businesses (Subsidiaries >50-100%)

Cement Division (100% owned)

• Produce and sell cement and concrete related products.
• Produce its own clinker which is used to produce cement, to lower reliance on imported clinker.
• Main revenue & profit contributor with 62% of total 9MFY21 revenue, ~40% of 9MFY21 PBT.

Construction Materials and Trading Division

• Wire manufacturing for construction industry (69.1% owned).
• Trading of water, electrical, mechanical, construction & telecommunication products (51% owned)

Road Maintenance Division (100% owned)

• Total length of state road maintained by CMSB has been cut to half from 6,168km/month (before year 2020) to 3,322km/month (starting from year 2020).
• Latest contract will last 10 years from 2020

Property Development Division

• Oversees development of 1,128-acre Samalaju Industrial Park (51% owned), including Samalaju Eco Park.
• Has hotels and lodges business in Samalaju Industrial Park.
• Bandar Samariang development (Kuching) since 1997 (100% owned). It has developed 4,619 residential units and 181 commercial units up to 2020.
• The Isthmus development which is the new Kuching CBD extension.

Integrated Phosphate Complex (60% owned)

• Owns 60% in Malaysian Phosphate Additives (Sarawak) Sdn Bhd (MPAS), who will construct Southeast Asian first integrated phosphate complex in Samalaju Industrial Park.
• Construction planned in 2 overlapping phases, but 3 plants under phase 1 (350 acres) which were originally scheduled to be completed by FY2020 was delayed due to MCO.
• RM898mil of investment for phase 1.
• Phase 1 once completed, will have annual production capacity of 48,000MT yellow phosphates, 75,000MT technical grade phosphoric acid and 60,000MT food grade phosphoric acid.
• Offers investment opportunities in downstream manufacturing such as industrial chemicals, animal feed, fertilizer, cleaning & detergent sectors.
• This subsidiary has posted RM15.8mil loss before tax in 9MFY21, mainly due to forex loss (USD loan) and staff cost.

Joint Ventures (49% owned, 51% owned by Sarawak state through SEDC)

Construction Materials and Trading Division

• Owns 5 quarries across Sarawak, with 4 operational at the moment.
• Premix Operation has 5 fixed drum mixed asphalt plants and 5 mobile drum mixed asphalt plants.
• Added 2 new premix sites in 2020 for Pan Borneo Highway project.
• Serve approximately 50% of the asphaltic concrete and bitumen emulsion markets in Sarawak.

Construction Division

• Waiting for new infrastructure construction projects handed out by the state government.
• Order book in reducing trend from RM1.03bil (Mac21) to RM0.89bil (Jun21) to RM0.79bil (Sep21).

Strategic Investment (Associates <30% owned)

Ferrosilicon & Manganese Alloy Smelting: OM Materials Sarawak/Samalaju Sdn Bhd (25% owned)

• Another 75% owned by OM Holdings Ltd listed in Australia, recently dual-listed in Bursa in Jun21.
• Planned production facility with 200,000 - 210,000 MTpa ferrosilicon capacity and 250,000 - 300,000 MTpa manganese alloy capacity.
• Used mainly in steel production industry.
• Benefit from low electricity cost from Sarawak's hydroelectric and 10 years tax holiday.
• Has 16 furnaces but operates 12 of them currently since the MCO (16 fully operational before MCO).
• Sinter plant commissioned in FY20Q4 which can reduce the manganese alloy production costs.
• Under planning for phase 2 with construction of additional 2 to 4 sets of manganese alloy furnaces targeted for completion by 2023.
• Future plan includes the conversion to metallic silicon to produce higher value added products.
• OM Materials (Sarawak) recent financial results, fluctuating wildly
• FY20: Revenue RM1.52bil, loss after tax of RM94.91mil
• FY19: Revenue RM1.9bil, loss after tax of RM3.15mil
• FY18: Revenue RM2.38bil, profit after tax RM254.3mil
• FY17: Loss before tax of RM18.3mil
• At the moment it is surely profitable despite lower production due to the escalating FeSi price.

Information & Communication Technology: SACOFA (50% owned)

• CMSB acquired 50% shares in SACOFA from Sarawak government in Apr15. Sarawak government holds 20.5%, Celcom Axiata holds 15.1% in SACOFA.
• Owns 1,900 telecommunication towers and 11,000 fibre optic cable throughout Sarawak.
• Over 55% towers in 2020 are 5G-ready.
• Built 94 towers in 2019 and 84 towers in 2020.
• SACOFA recent financial results, as stable as rock
• FY20: Revenue RM254.6mil, PBT: RM114.3mil
• FY19: Revenue RM242.3mil, PBT: RM112.6mil
• FY18: Revenue RM232.6mil, PBT: RM105.0mil
• FY17: Revenue RM205.0mil, PBT: RM105.8mil
• SACOFA made RM38mil PBT in FY21Q1, so it's RM19mil PBT to CMSB in 3 months.

Investment Banking: Kenanga (18% owned)

• Sold shares off market to reduce stake in Kenanga from 25.2% to 18% in Feb21.
• Kenanga JV with Japan-based Rakuten Securities Inc to launch Rakuten Trade in Malaysia since May 2017.
• Kenanga posted RM86mil PATAMI for 9MFY21 (RM15.5mil to CMSB in 9 months)

Steel Fabrication & Construction: KKB Engineering (20%)

• KKB is involved in civil construction, steel fabrication, steel pipes manufacturing, hot-dip galvanising & LP gas cylinder manufacturing.
• It gives CMSB exposure to oil & gas sector with its onshore fabrication jobs for offshore facilities. 
• KKB registered PATAMI of RM21.6mil in 9MFY21 (RM4.32mil to CMSB in 9 months).

Education

• Has 23% stake in Tunku Putra-HELP International School in Kuching.
• New 1,500-student capacity campus opened in Jan 2020.
• Loss before tax of RM7.9mil in FY2020.

As mentioned earlier, CMSB targets RM500mil PATAMI by year 2024. The breakdown given by the company is as follow:

• RM250mil from core businesses (cement, construction, construction material & trading, road maintenance & property development)
• RM100mil from OM Materials
• RM100mil from MPAS
• RM50mil from SACOFA

Sarawak state election has just ended and without a doubt the rock solid GPS won comfortably. There is little political risk to CMSB.

As the child of Sarawak, CMSB is expected to reap benefit when the state rolls out various development projects which include Pan Borneo Highway, Coastal Road, Second Trunk Road, Autonomous Rapid Transit (ART), Baleh hydroelectric power project, government schools, hospitals, houses etc.

Construction projects need lots of cement and concrete products, CMSB has them in plenty. Road construction and maintenance need lots of asphalt, CMSB also has it. Build more telecommunication towers and fibre optic under JENDELA? CMSB can do it as well.

Besides, CMSB also put its hands into smelting & phosphate plants, oil & gas onshore fabrication, investment banking and education.

It is certainly a conglomerate that plays a major part in Sarawak's development.

Nevertheless, investing in CMSB is not without risk.

The main risk to me is its corporate governance issue, which does not need to be explained very clearly here.

Its ex-CFO who was suspended back in May21 due to financial mismanagement was permanently removed eventually. Ironically, this CFO won The Best CFO in 2020 and 2019.

The main issue that triggered a special review by KPMG back in May21 was the loss incurred from the RM1.36 bil Pan Borneo Highway Phase 1 contract which is a JV of 70:30 with Bina Puri Sdn Bhd.

The project is profitable at the JV level but CMSB somehow played "now you see it, now you don't" magic until it suffered RM57mil loss since 2017. Where did the profit go?

Other than this, the special review which was completed in Nov21 also revealed that poor hedging transaction for its 25%-owned OM Materials resulted in RM7.9mil & RM75.6mil forex loss in FY15 & FY16 respectively.

For its investment in MPAS, the special review pointed out that there was "lack of due diligent and stakeholder management". 

CMSB entered into this joint venture in 2013 "without thorough due diligence undertaken on the counterparty risks including financial and technical capabilities".

The MPAS project which was initially slated for completion in 2020, was delayed multiple times. In its latest FY21Q3 report, CMSB mentioned that the project has not been progressing well due to technical and commissioning issues, and it continues to "evaluate all options of future direction of the MPAS project".

This sounds a bit worrying to me, especially the "evaluate all options of future direction" part. Shareholders should pray that MCO is the only reason for the delay.

Will the change of CFO prevent all these from happening again in the future?

Besides, Sarawak Report, with "evidence" from whistleblower, accused one of its director for alleged conflict in interest when giving out contract but it was swiftly concluded to be "without any basis whatsoever" by CMSB board.

I think financial mismanagement or conflict of interest is not uncommon in the business world. CMSB is a standout one so investors have to swallow the risks.

As long as it can generate good profit growth and cash flow, and its share price goes up, no one will care.

From the annual report FY20, the Taib family holds 23% in CMSB. 

Currently the family has 2 representatives in the board, which are the Deputy Group Chairman DS Mahmud Abu Bekir Taib and recently appointed Managing Director DS Sulaiman Abdul Rahman. Both are the sons of Sarawak's current Governor. 

DS Sulaiman used to be CMSB's acting CEO & chairman but he retired in 2008 to join politic. He was the former deputy minister of tourism.

There are quite a lot of changes in the boardroom and management team of CMSB in the past 2 years.

This might be the company's effort to improve its efficiency and transparency. Hopefully it's not like what Chinese say "change the soup but not the ingredients".

Will CMSB still get the same privilege treatment from Sarawak government?

From 1st Jan 2020, CMSB's 100%-owned road maintenance company's contract was cut into half by the state government. Does this mean that CMSB is slowly losing its special status to make room for others?

CMSB's jewel which is the 50%-owned SACOFA has a 20-year concession with exclusive right to build, manage, lease and maintain telecommunication towers in Sarawak.

However, the concession will end this year on 31 Dec 2021 and there is still no news on the renewal. 

Will the state government renew the concession? Most likely it will as the state government also has 20.5% stake in SACOFA. 

If the concession is renewed, will it be the same as the previous one? Or it will shrink like its road maintenance contract?

The state government can form another JV with other companies to get the concession anyway.

SACOFA has contributed superb recurring profit to CMSB. If the concession is not renewed, how will it affect CMSB's profit?

I think CMSB can still generate current recurring income from SACOFA, just that it will not get to build and manage more towers in the worst case.

There is no doubt that CMSB will get construction contracts from the state government, as SEDC now owns 51% of its construction and construction material divisions.

But, CMSB will only get 49% of the profit the most. It will be less if the contract has a JV just like its phase 1 Pan Borneo Highway contract.

The main revenue and profit of CMSB will still come from its cement business. More construction activities mean more demand for cement and concrete products.

In near term though, the management has guided that FY21Q4 profit from cement division might drop due to planned annual maintenance shutdown and higher clinker cost.

I don't think its property development will contribute much, as I'm not so confident with property market in Sarawak.

CMSB does not provide new sales and unbilled sales figures for its property segment.

To achieve its RM500mil PATAMI by 2024, I think RM250mil from its core business is possible but very challenging. 

The table below shows segmental profits of CMSB in FY20 & FY19. To get a more accurate impression, look at profits in FY19 which were not affected by one-off gain and loss. We can see how much its cement division contributed to its bottom line.

The "discontinued operations" refer to its "construction material & trading" and "construction" segment after it sold 2% shares to SEDC. These discontinued profits will be added to "share of results of joint ventures" in FY21.

Back to its 5-year RM500mil PATAMI target, I think another RM100mil contribution from the ferrosilicon and manganese alloy smelting operation is achievable, as long as the market price of its products is right.

FeSi price surged in Q3 of 2021 to historical high as shown in the chart below. 

Even though the price also dropped fast, it's still relatively high compared to year 2019-2020.

OM achieved a spectacular RM254mil net profit in 2018 (RM64mil to CMSB) when FeSi price was higher in that year.

This is the main reason why CMSB as a group enjoyed its record breaking profit in FY18.

From the chart above, current FeSi price is at the level of year 2018.

Its furnaces utilization is expected to improve post pandemic and there is further increase in capacity.

The target of RM50mil contribution from SACOFA is easy as it has already achieved this level since FY17.

The major growth factor for CMSB will be its integrated phosphate complex (MPAS). The management does not guide the profit level except targeting RM100mil contribution by 2024 once both phases are up and running.

This project seems to be in some trouble and CMSB does not give a time frame for its expected completion date now.

Personally I don't think it can be ready in the first half of year 2022.

KPMG's review report tells me that CMSB does not take this project seriously and does not execute it competently. 

Hopefully the newly installed CEO of MPAS Ir Tiong Huo Chiong since Mac21 will be able to steer MPAS into the right direction.

CMSB still has other "back-up" profitable associates such as the Bursa-listed Kenanga and KKB which can help it to achieve its profit target. 

Overall, CMSB is a big company with certain amount of monopoly but it's definitely not perfect.

Its main business seems to be confined to Sarawak only. Whether it can grow beyond Sarawak remains to be seen.

However, its current share price of RM1.30 is quite attractive to be honest. 

Even if it can just achieve half of its PATAMI target (RM250mil), its EPS will be 23.3sen. PE valuation of 10x will give it a fair value of RM2.30 which means a decent 80% upside in 3 years.

As a child (Cahaya Mata) of Sarawak, will his mother continue to spoon feed him, or let him be more independent as he has grown up?