Analysis: Cahya Mata Sarawak still enjoys sole position

KUCHING (July 25): Mercury Securities Sdn Bhd (Mercury Securities) believe concerns over potential new cement players in Sarawak are overblown as Cahya Mata Sarawak Bhd’s (Cahya Mata Sarawak) key cement division has long enjoyed being a ‘natural monopoly’ due to the high barriers of entry.

This is mainly because the overall cement demand in Sarawak is not large enough to support a two-player market, especially now with Cahya Mata Sarawak committing to build a second clinker plant to triple its capacity from 0.9 million tonnes per annum (MT/pa) to 2.8 MT/pa eventually, being 100 per cent self-sufficient.

“Any new entrants would also be deterred by the geographical challenges in Sarawak such as suitable plant location, distribution network and so on,” Mercury Securities said in a report.

It added that the dispute resolution with Syarikat Sesco Bhd (Sesco) will serve as a near-term catalyst for the group. So far, the ongoing dispute with Sesco has had a negative impact on sentiment and earnings for Cahya Mata Sarawak.

“Since May 2023, Sesco has cut electricity supply to Cahya Mata Sarawak’s phosphate plant, leading to no revenue generation but incurring losses from commissioning costs and inventory write-downs.

“The phosphates division recorded RM19 million losses in 1Q24, compared to the RM38 million net profit reported by the group.

“Arbitration proceedings are scheduled to begin hearings next month on 26-29 August.”

Based on consensus forecasts, Mercury Securities saw that Cahya Mata Sarawak is currently trading at an undemanding valuation of 7.6 times its FY24 price earnings and 0.45 times its FY24 price-to-book ratio.

“Its valuation has been heavily discounted largely due to perceived political risks, which we believe were partly misunderstood especially for its key cement division.

“In our view, a favourable dispute resolution with Sesco will drive further earnings upside, while a potential increase in stake held by the Sarawak state government (who currently owns 5.7 per cent via SEDC) could help to significantly narrow the political risks discount.”