CMS sees strong growth in FY17
Lim Cian Yai 
A CMS concrete plant. The group has a market share of 60% in the concrete and bitumen emulsion markets
AFTER posting lukewarm results last year, Cahya Mata Sarawak Bhd (CMS) has staged a rebound of sorts and expects to end the financial year on a high note.

For H1 FY17 ended June 30, the Sarawak-based group’s net profit swelled to RM87.39 mil, a massive 876% increase compared to RM8.94 mil last year.

The earnings surge came despite a 10% drop in revenue to RM670.57 mil versus RM745.72 mil a year ago.

The improved bottom line was mainly attributed to lower losses from associate companies, increase in profit share from joint ventures, and higher earnings from the property and cement divisions.

CMS expects the improved performance to be carried throughout the rest of the year.

Curtis says CMS' business activities will pick up further in H2

Group managing director Datuk Richard Curtis says the level of business activities is expected to pick up further in H2 with CMS likely to see growth in demand and price improvements.

Having said that, Curtis stressed there was already a small economic upturn during H1 in the local and global scene.

“The key factors that drive our numbers are Sarawak’s development spending, economic growth and commodity price to a lesser extent.

On track

“With both these macroeconomic factors showing signs of improvement, CMS is on track to improve top line and bottom line performance,” he says.

For the first time since FY12, CMS registered a decline in revenue and net profit in FY16 against the backdrop of a weaker macroeconomic environment.

Turnover slipped 13.23% to RM1.55 bil from RM1.79 bil last year. Net profit declined 31.82% to RM169.17 mil from RM248.14 mil.

Save for real estate activities, all other core divisions recorded lower revenue in H1.

Despite the lower sales volume, CMS’ core cement division recorded a 13% increase in pre-tax profit to RM47.04 mil, surpassing the RM41.69 mil recorded in the previous corresponding period.

The division is the largest revenue contributor with RM242.18 mil in sales during its first six months.

The cement business benefited from lower clinker and coal prices while profitability was further improved by lower handling costs which are fixed.

Clinker is a dark grey material made by heating ground limestone and clay at high temperatures. The nodules are then ground into fine powder to produce cement.

CMS operates three grinding plants in Sarawak with two in Kuching, including East Malaysia’s first integrated cement plant in Mambong, which commenced operations last November. The other facility is in Bintulu.

CMS expects to end FY17  on a high note

Infrastructure projects

The RM190 mil Mambong integrated cement plant will help CMS cope with growing demand due to the implementation of mega infrastructure projects such as the Pan Borneo Highway and upcoming Baleh hydroelectric project.

The power project will generate an additional 1,285 megawatts of renewable energy when fully commissioned in 2025.

The 2,083km-long Pan Borneo Highway will serve as the transportation backbone of Sabah and Sarawak upon completion in 2022.

The cement plant will produce one million metric tonnes (MT) per annum. If the Mambong plant runs at full capacity, it will ramp up CMS’s total grinding capacity to 2.75 million MT per annum from 1.7 million MT currently.

This is well above local demand of between 1.6 million and 1.8 million MT per year.

The reserve capacity might also enable CMS to extend supply to nearby export markets, the company said in its 2016 annual report.

However, Curtis expects such sales to be modest and unlikely to have a material impact on CMS’s revenue or sales volume, given Sarawak’s lack of proximity to potential export markets and excess capacity in the region.

Essentially, the new plant serves to reduce the risk of supply disruptions.

“The utilisation rate of our grinding plant is under 70% now. The additional supply will enable us to stop indefinitely importing cement at a low margin.

“Secondly, it allows us to undertake overhauls and upgrades to both the Kuching and Bintulu plants on a sequential basis,” Curtis says.

The other two plants are about 35 and 15 years old respectively. Should CMS decide to upgrade them, each will involve a shutdown of about three months.

This will cause supply disruptions as the two plants meet all if not nearly all of the state’s cement demand.

Hence, the excess capacity offers CMS room to run the two older plants at a more optimised level of utilisation instead of being overutilised.

This will reduce excessive wear, tear and risk of unscheduled shutdowns due to the inability to carry out scheduled maintenance on a timely basis.

An unplanned shutdown will subsequently lead to severe cement shortages.

The new integrated cement plant may also discourage other market players from competing with CMS in the same sphere by adding additional capacity or increasing trading activities.

Being the sole cement and clinker manufacturer in Sarawak, CMS will no doubt be one of the key beneficiaries of the Pan Borneo Highway’s implementation.

Multiple work packages for the highway’s construction have been dished out gradually since December last year.

However, UOB KayHian analyst Abdul Hadi Manaf believes the progress of all the works remains muted at the moment as the project is still in its infancy.

“We also sense the general economy in Sarawak is rather soft as consumers are holding back on purchases of big ticket items, particularly property, ahead of the 14th general election,” he says in a recent report.

UOB KayHian has assigned a hold call on the counter with a target price of RM3.80.

CMS’ construction materials segment will also complement the cement business, where growth will be supported by the mega highway.

The group has five quarries supplying 30% of the stone aggregates sold in Sarawak. It also has six premixes and a mobile plant with a market share of 60% in the concrete and bitumen emulsion markets.

Modest demand

Nevertheless, sales of building materials for the first six months of FY17 were down by 34.13% year-on-year to RM182.13 mil from RM276.5 mil earlier.

While CMS declines to comment on the progress of the Pan Borneo Highway, it acknowledges that the demand for building materials has not fully picked up.

“CMS has begun supplying stones, premix and sand to certain packages of the Pan Borneo Highway.

“Demand for construction materials (including cement), however, is still modest as most of the work packages currently involve site clearing and earthworks.

“Thus, the bulk of the demand is only expected to kick in from 2018,” says Curtis.

Notwithstanding this, CMS continues to invest to maintain its growth trajectory and take advantage of opportunities arising from other development plans as well as the Pan Borneo Highway.

The group has committed to spending RM285 mil in FY17 for procurement of machinery, and expansion of clinker production and quarries.

Part of the capital expenditure has also been earmarked for new asphaltic bitumen batch plants in anticipation of a surge in demand for asphalt from the Pan Borneo Highway project.

This article first appeared in Focus Malaysia Issue 248.