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[Ferro-Alloys.com]Cahya Mata Sarawak Bhd’s (CMS) recent subscription to RM110 million convertible preference shares (CPS) in OM Materials (Sarawak) Sdn Bhd (OMS) has suggested that the latter’s business environment may be more challenging than RHB Research Institute Sdn Bhd’s (RHB Research) initial projection.
According to RHB Research, it has been a while since the research house first highlighted a potential risk of CMS investment in the group’s 25 per cent-owned OMS.
“Ferrosilicon prices have plummeted in tandem with the broad weakness across the commodity complex, thus dampening its earnings outlook.
“CMS has recently subscribed RM110 million CPS issued by OMS,” the research house said.
This unexpected cash call suggests that the outlook for OMS may be more challenging than RHB Research had expected.
It noted that while a total of 16 furnaces at OMS’ ferrosilicon facilities have been completed, only six are currently in operations.
OMS aside, RHB Research remained upbeat on CMS’ overall outlook.
The research house highlighted that earnings from CMS’ road maintenance and materials and trading divisions have risen ahead of the impending Sarawak state election.
RHB Research also believed that both divisions may eventually benefit from the RM26 billion Pan Borneo Highway project that would help to sustain the high earnings base recorded in finanical year 2015 (FY15) moving forward.
“Meanwhile, we think that the commissioning of its new grinding plant in Mambong, Sarawak could help to improve profitability of its cement unit in FY16.
“Its October 2015 acquisition of a 50 per cent stake in Sacofa Sdn Bhd, the sole telecommunication tower service provider in the state, would also see full-year earnings contribution from 2016 onwards,” the research house said.
On forecast and key risks, RHB Research pointed out that CMS’ response to Bursa Malaysia’s query on the reason for the group’s subscription to OMS’ CPS was to help meet the latter’s cash flow demand.
RHB Research suspected OMS may have suffered deeper losses than the research house had initially projected.
The research house revised down its FY16F and FY17F earnings by 14.8 per cent and 7.6 per cent respectively but kept its FY18 estimates intact, after cutting its forecast on OMS.
“OMS remains the single largest risk within the group as the extent of its operating losses remains uncertain and we cannot discount the possibility of a wider loss than our newly-revised numbers,” the research house stressed.
Nevertheless, RHB Research continued to like CMS as the best proxy to the rapid development activities in Sarawak.
“However, potential losses at OMS may dampen investor sentiment on the stock,” it said.
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