KUCHING: RAM Ratings has reaffirmed the AA3/Stable rating for Cahya Mata Sarawak Berhad’s (Cahya Mata or the Group) RM2.0 billion Islamic MTN Programme (2017/2037), with the Group’s AA3/Stable/P1 corporate credit ratings.
These affirmations are based on expectations of a gradual improvement in the Group’s operational performance and the maintenance of a robust financial profile.
“Given Cahya Mata’s strong position within Sarawak’s cement industry, the Group stands to benefit directly from the state’s growing economy and infrastructure development,” said the rating agency in a statement on Monday (Feb 26).
The Group reported a rise in revenue for FY Dec 2022 and the first nine months of FY Dec 2023, reaching RM1.01 billion and RM868.09 million respectively, up from RM814.55 million in FY Dec 2021.
However, pre-tax earnings, after adjusting for one-off items, saw a year-on-year decline, recording RM200.22 million and RM98.28 million for the respective periods, down from RM250.50 million in FY Dec 2021. This decrease was attributed to significant pre-operating expenses for a new phosphate manufacturing division and a reduction in associate profits.
The decline in earnings, coupled with increased working capital requirements and taxes, resulted in a cash flow deficit for the 9-month period ending Dec 2023.
Looking ahead, Cahya Mata’s operational performance and earnings are expected to improve, supported by its strategic market position and anticipated increase in development expenditure by the state government.
In response to expected cement demand growth, the Group plans to invest RM750 million in a new clinker plant, aiming to reduce or eliminate the need for costly imported clinker.
“This investment is projected to enhance margins and fortify the Group’s competitive position. Meanwhile, progress on the commercialisation of the phosphates manufacturing division is paused,” it added.
Cahya Mata is currently involved in arbitration with Syarikat SESCO Berhad (SESCO) regarding a power purchase agreement, with the power supply cut off in July 2023 due to the on-going legal dispute.
“While optimistic about the division’s earnings potential, the continued halt in operations could extend losses and potentially lead to impairments. Losses between RM80 million to RM100 million annually are anticipated, along with possible one-off costs surpassing RM266 million in contingent liabilities as of December 2022. The situation will be reassessed upon gaining clarity on the dispute’s resolution,” it said.
Despite temporary setbacks in debt coverage, Cahya Mata’s prudent debt management and divestiture of non-core assets have kept its financial standing strong. A solid balance sheet provides resilience against challenges from the phosphates manufacturing sector and prepares the Group for significant investments in its cement operations.
Debt levels are projected to increase to approximately RM1 billion by the end of 2025, up from RM419.58 million as of September 2023.
“The Group’s financial health is expected to remain robust over the next two years, with gearing and net gearing ratios predicted to stay below 0.35 times and 0.25 times, respectively (as of September 2023: net cash),” it continued.
Although debt coverage is forecasted to improve, a temporary dip may occur, depending on the outcome of the SESCO dispute.
The Group’s heavy reliance on Sarawak’s economy and its limited geographical diversification, along with the cyclical nature of its core businesses, are considered constraints on its ratings.
Cahya Mata also benefits from its investments in the communications sector, contributing 10 per cent to 25 per cent of pre-tax earnings, and expects its drilling fluids and waste management ventures to play a more significant role in its long-term earnings.
