Analysts: OM Sarawak could put a drag on CMS’ future earnings
Cahya Mata Sarawak Bhd (CMS) will likely see a drag in its upcoming second quarter of 2019 (2Q19) earings due to lower contributions from its associate, OM Materials (Sarawak) Sdn Bhd (OM Materials).
This comes as AllianceDBS Research Sdn Bhd (AllianceDBS Research) cut its forecast earnings for CMS’ financial years 2019 (FY19), FY20 and FY21 by 20, 22 and 14 per cent respectively, largely to factor in lower contributions from OM Sarawak.
“The weaker associate profits arising from depressed manganese and ferrosilicon prices more than offsets the improved contributions from CMS’ cement and construction materials business,” it highlighted in a company report yesterday.
“As a result, we expect CMS’ FY19F earnings to contract by 12 per cent. We downgrade our call to hold with a lower target price of RM3.10.”
This is largely due to lower OM Sarawak contributions, which AllianceDBS Research pegged to weak manganese and ferrosilicon prices.
The 25 per cent-associate OM Sarawak owns a greenfield ferrosilicon (FeSi) and manganese alloy (SiMn) smelter in Samalaju, Sarawak. The remaining 75 per cent stake is held by OM Holdings Ltd, an Australianlisted vertically-integrated miner, smelter and trader of manganese and other ores/alloys.
Phase 1 has a total of 16 units of furnaces, of which 10 units are allocated for the production of FeSi while the remaining six units are allocated for the production of manganese alloy.
“We believe OM Sarawak will unlikely be able to replicate its stellar performance in FY18,” it opined. “In fact, we project OM Sarawak’s earnings contribution would contract by 86 per cent year on year (y-o-y), mainly due to the decrease in sales volume, and weak manganese and ferrosilicone prices.
“We understand that this was due to lower demand as a result of market uncertainties, driven by on-going trade war between the US and China.”
A price recovery for both ferrosilicon and manganese would be required for improved contributions from OM Sarawak, the research house said, estimating that every US$50 change in prices would impact CMS’ earnings by about nine per cent.