PETALING JAYA: Cahya Mata Sarawak Bhd (CMS) plans to use the bulk of the RM526.6mil proceeds it will receive from the disposal of its 25% stake each in OM Materials (Sarawak) Sdn Bhd and OM Materials (Samalaju) Sdn Bhd for working capital and investments.
The Kuching-based group plans to allocate 50% or RM263.3mil of the proceeds for working capital while 25% or RM131.7mil be used for future acquisitions or investments with no indications of a special dividend payout, MIDF Research said in a report yesterday.
The sale of the stakes to OM Materials (S) Pte Ltd, a wholly owned subsidiary of OM Holdings Ltd, will raise CMS’ net cash to RM627.2mil according to the research house.
“We believe this is a good chance for CMS to exit the erratic ferrosilicon and manganese alloy smelting business and profit from the disposals thanks to the raw material prices which remained elevated even after normalising from its peak in the third quarter of 2021 (3Q21).
“Prospects are still bright for CMS with the rising demand for cement works and its strengthened war chest for upcoming investments or acquisitions,” it said.
OM Sarawak sells and processes ferroalloys and ores produced at its ferrosilicon and manganese alloy smelter in Sarawak, while OM Samalaju provides project development and project management services.
OM Sarawak has been benefiting from the stronger ferroalloy and ferrosilicon prices over the past year despite lower production volumes due to Covid-19 related disruptions.
The company made a net profit of RM116mil in the first quarter of financial year 2022 (1Q22), which contributes about 39% to CMS’ core earnings.
In FY21, OM Sarawak posted RM350.9mil in earnings which accounted for 49% of CMS’ core earnings. OM Sarawak was loss-making in FY17, FY19 and FY20, MIDF Research added.
The RM526.6mil price tag included estimated loans of RM47.3mil to both OM Sarawak and OM Samalaju.
Excluding the loans, the net disposal consideration is RM479.4mil, which is a RM8.1mil or a 1.7% premium to the RM471.3mil valuation for both entities.
The gain on disposal that will potentially be recognised to CMS is RM147.6mil. The sale is expected to be completed by 4Q22.
MIDF Research has maintained a “buy” call on CMS but cut its target price to RM1.37 a share (from RM1.62), derived by pegging a price earning multiple of eight times to CMS’ FY23 earnings per share of 17.1 sen.
The research house cut CMS’ core earnings forecast for FY23 and FY24 by 15% to RM185.6mil and RM195.84mil respectively due to expectations of lower contribution from CMS’ associates. CMS closed 5.5 sen or 5.24% lower at 99.5 sen, giving the diversified group a market cap of RM1.07bil.