RAM Ratings’ affirmations reflect expectations for CMS Group to improve operations
KUCHING: RAM Ratings has affirmed the AA3/Stable rating of Cahya Mata Sarawak Berhad’s (CMS Group) RM2 billion Islamic Medium Term Note (MTN) Programme (2017/2037) and the group’s AA3/Stable/P1 corporate credit ratings.
“The affirmations reflect our expectations that the CMS Group will gradually improve its operating performance and keep its financial profile robust,” said the ratings house in a press statement issued yesterday.
It viewed that given CMS Group’s strong foothold in Sarawak’s cement industry, it had become a direct beneficiary of the state’s expanding economy and infrastructure development.
“The CMS Group’s topline in fiscal year (FY) December 2022 and 9M (nine-month) FY December 2023 advanced to a respective RM1.01 billion and RM868.09 million (FY Decembwer 2021: RM814.55 million) as a result.
“Pre-tax earnings after adjusting for one-off items nonetheless were weaker yearon-year (YoY) at RM200.22 million and RM98.28 million for the said periods (FY December 2021: RM250.5 million), weighed down by the hefty pre-operating costs of CMS Group’s new phosphates manufacturing division and lower share of associates’ profits.
“The lower earnings coupled with higher working capital and taxes led to an operating cash flow (OCF) deficit for 9M FY December 2023.
“CMS Group’s operating performance and earnings are anticipated to gradually improve moving forward, anchored by its favourable market positioning which will benefit from the state government’s increasing development spending.
“In view of the expected rise in cement demand, the CMS Group will add a new RM750 million clinker plant, set to reduce or eliminate the need for more expensive imported clinker.
“We envisage the plant to improve its margins and strengthen its positioning against potential new competitors.”
In the meantime, the operations and progress towards the commercialisation of the phosphates manufacturing division would remain on hold, said RAM Ratings.
CMS Group is currently engaged in arbitration proceedings with Syarikat Sesco Berhad (Sesco) over the terms of a power purchase agreement.
The power supply was terminated in July 2023, arising from the ongoing legal dispute with Sesco.
“Although we are positive about the division’s earnings potential, the continued stoppage of operations will prolong losses and may result in impairments.
“We estimate the Group CMS to incur between RM80 million to RM100 million of losses per annum while it may also be liable for hefty one-off costs in excess of RM266 million of contingent liabilities as at end-December 2022.
“We will reassess the impact when there is more clarity on resolution of the dispute,” it said.
CMS Group’s prudent management of debts and divestment of non-core assets had allowed it to keep its financial profile robust despite temporarily weaker debt coverage, said RAM Ratings.
“A strong balance sheet provides a buffer to face headwinds stemming from the phosphates manufacturing segment and gear up for significant capital expenditure for the cement business.
“Total debts are expected to rise to about RM1 billion by end2025 from RM419.58 million as at end of September 2023.
“We forecast CMS Group’s financial profile to remain strong over the next two years, with gearing and net gearing staying below a respective 0.35 times and 0.25 times (end-September 2023: net cash).
“OCF debt coverage (including contributions from joint ventures and an associate) is estimated to improve to above 0.2 times in the same period although a one-off dip is possible, depending on the resolution of the dispute with Sesco.”
It said CMS Group’s heavy reliance on Sarawak’s economy, a lack of geographical diversification and CMS Group’s cyclical core businesses were the ratings moderators.
Other than constructionrelated sectors, the CMS Group’s stakes in communication-related business contributed 10 per cent to 25 per cent of pre-tax earnings.
“It expects earnings from the drilling fluids and drilling waste management businesses to become more meaningful over the longer term.
“Following the revamping of its board and senior management composition in 2021 owing to governance gaps, CMS Group’s board continues to improve internal controls and risk management,” said RAM Ratings.