CAHYA MATA SARAWAK BHD

By UOB Kay Hian Malaysia Research Buy Target Price: RM5.20

UOB Kay Hian Malaysia Research has revised up its 2018 earnings per share for Cahya Mata Sarawak Bhd by 15% to RM314mil, which is 17% above consensus forecast.

The research house said there could be a significant upside to its forecast, which conservatively assumes a lower base case for earnings from OM Holdings (OMH) and the Pan Borneo Highway (PBH)-related earnings stream.

UOB Kay Hian said it expects Cahya Mata’s 25% JV in OM Sarawak’s (OMS) net profit to reach RM52.1mil in 2018 after posting a narrowed year-on-yea (y-o-y) loss last year, mainly due to non-cash flow forex-related impact.

OMH’s Q4’17 results were particularly galvanising, with core earnings before forex impact at US$11.1mil.

Based on OMH’s filings, sales volume at OMS improved tremendously with ferrosilicon sales for 2017 increasing by 38% y-o-y to 174,540 tonnes while manganese sales improve tremendously from 876 tonnes in 2016 to 173,911 tonnes in 2017.

UOB Kay Hian is of the view that the average selling price (ASP) is still stable at US$1,600 to US$1,800 per tonne and all 15 furnaces are running at full capacity.

It estimated that Cahya Mata’s 40% stake in Malaysian Phosphate Additives Sarawak (MPAS), which will be commissioned by second half of next year, will enhance shareholder value by 10%.

Just like in the case of OMS, the heavily energy dependent MPAS will derive much of its value by tapping into Sarawak’s cheap hydro electric supply.

UOB Kay Hian expects strong earnings in 2018 by Cahya Mata.

This will be predominantly driven by a significant turnaround at OMS as well as an improvement in earnings across other business segments.

It added that Cahya Mata’s 2018 earnings could easily beat consensus net profit target of RM272mil, given that 2017’s core profit was already at RM262mil and factoring in the company’s conservative assumption of OMS’ net profit contribution of above RM50mil in 2018 (based on a well below market ASP of US$1,200 per tonne) versus a RM28mil loss in 2017.

As such, UOB Kay Hian said it has upgraded Cahya Mata to a “buy” call with a higher target price of RM5.20 (previously RM4.30) following a 15% earnings forecast adjustment for 2018.