Cahya Mata Sarawak’s target price slashed to RM3.30

PETALING JAYA: AllianceDBS Research has slashed Cahya Mata Sarawak (CMS) Bhd’s target price to RM3.30 from RM5.25 previously given the weak performance of its 25%-owned OM Materials (Sarawak) Sdn Bhd (OM Sarawak).
“While we believe most of CMS key operating segments should recover in subsequent quarters given the rollout of Pan Borneo Highway projects, the continued weakness at 25%-owned OM Sarawak will still be a drag on earnings as well as sentiment of the stock,” it said in a report yesterday.
Analyst Toh Woo Kim, who kept his “hold” recommendation on CMS, does not foresee a rerating in the company’s share price unless there is a turnaround in OM Sarawak from improving ferrosilicon prices.
Due to depressed ferrosilicon prices, OM Sarawak production volume had been very low with only 40% utilisation rate whereby only six out of 16 furnaces are in operation.
To mitigate this, OM Sarawak is planning to convert six of its furnaces to manganese alloy production, which is seeing better demand.
To strengthen its financial position, CMS also recently subscribed to RM110 million convertible preference shares issued by OM Sarawak.
Toh trimmed its FY16-18 forecast earnings per share on CMS by 37-50% after adjusting for lower sales volume and higher production costs.
More importantly, it now forecast RM42 million share of net losses from OM Sarawak, compared with a share of profit of RM52 million previously.
“Given the weak performance of OM Sarawak, we ascribe no value to this associate for now and apply a 10% holding company discount to our sum-of-part (SOP)-based valuation. Together with the earnings cut, our SOP-based target price for CMS is now slashed to RM3.30,” Toh said.