RAM Reaffirms Cahya Mata Sarawak Ratings

RAM Ratings has reaffirmed the AA3/Stable rating of Cahya Mata Sarawak Berhad’s RM2.0 bil Islamic MTN Programme as well as the Group’s AA3/Stable/P1 corporate credit ratings. The reaffirmation reflects RAM’s expectation that CMS’s operating performance will gradually improve as it directly benefits from the pick-up in Sarawak’s construction activity.

Accordingly, the Group’s financial profile, particularly it’s cashflow debt coverage, is anticipated to improve steadily in the immediate two years to stay commensurate with its ratings. In the past year, CMS made major changes to the composition of its board and revamped its senior management lineup. This follows allegations of and investigations into governance-related issues involving a key board member and senior management personnel. While the probe into the board member found the allegations to be without basis, a special review on the financial management of past investments revealed governance gaps. These events raise concerns over the Group’s governance risks and
potential negative investor and market perceptions.

The Rating house recognises the positive remedial measures taken by the board to strengthen the Group’s internal controls and risk management. Dato Sri Sulaiman Abdul Rahman B Abdul Taib, who helmed CMS from 1995 to 2008, now heads the heavily revamped key management team as Group Managing Director.

As the sole cement manufacturer and key construction materials supplier in Sarawak, CMS was consequently severely impacted. Its top line fell to RM739.66 mil in FY Dec 2020, remaining subdued at RM572.93 mil for 9M FY Dec 2021 (FY Dec 2019: RM1,085.81 mil). The Group’s pre-tax profit of RM225.44 mil for fiscal 2020 (fiscal 2019: RM247.90 mil) would have been significantly lower without one-off gains and impairments that collectively lifted its bottom line by RM82.88 mil. Pre-tax profit for 9M fiscal 2021 came in at RM202.11 mil, also benefiting from an RM28.52 mil gain on the disposal of quoted shares and a strong share of earnings from an associate.

The Group enjoys a dominant market position in Sarawak’s cement industry, its considerable excess capacity adequate to support the state’s future cement requirements. This coupled with an established state-wide distribution network positions the Group well to compete against potential new industry entrants.

CMS’s balance sheet remained robust despite debts rising to RM934.53 mil as of end-September 2021 (end-December 2020: RM893.02 mil) mainly to fund capital expenditure for its cement division and new phosphate plant. Gearing and net gearing (including money market instruments) were a respective 0.29 times and 0.13 times
on the same date (end-December 2020: 0.30 times and 0.19 times). RAM expects the Group’s balance sheet to stay healthy in the immediate two years with gearing and net gearing ratios of about 0.3 times and 0.2 times, respectively.

The family of Sarawak’s governor holds a substantial stake in the Group. Following recent changes in the boardroom and senior management lineup, greater influence from the major shareholder could raise further governance or reputational issues which could work against efforts to secure contracts. This risk is alleviated to some extent
by CMS’s entrenched market position and proven track record, the infusion of strong independent board members, and the commitment to transparency and governance demonstrated by the new senior management team, including open disclosures in recent announcements.

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