SINCE Cahya Mata Sarawak Bhd (CMS) began its restructuring some time ago, the conglomerate has been making some notable moves.

       That has included a significant revamp in its board and top management line-up; strengthening internal controls and risk management; and more recently diversifying into the energy sector via the acquisition of Scomi Oilfield Ltd.

       But perhaps the most significant is the latest announcement that it plans to divest its entire 25% stakes in OM Materials (Sarawak) Sdn Bhd (OM Sarawak) and OM Materials (Samalaju) Sdn Bhd (OM Samalaju) for a combined US$120mil (RM524.82mil) cash – a figure which is close to half the market cap of CMS.

       ALSO READ: OM Holdings to buy out CMS’ smelting stake

       CMS is hiving off its stake to Australia-listed OM Materials (S) Pte Ltd (OMS), which currently owns the remaining 75% stakes in both OM Sarawak and OM Samalaju.

       Towards this end, CMS’ unit, Samalaju Industries Sdn Bhd, has inked a binding offer with OMS for the proposed disposals, the group announced on Thursday.

       The offer remains valid up to May 30, 2022 and needs the approval of CMS shareholders at an EGM.

       OM Sarawak, which owns a ferroalloy and manganese alloy smelting plant in the Samalaju Industrial Park (SIP) in Bintulu, is one of CMS’ two strategic investments in the industrial park.

       The group’s other SIP-related investment is in an integrated phosphate complex project called the Malaysian Phosphate Additives (Sarawak) Sdn Bhd (MPAS), where it owns a 60% stake.

       Why is CMS hiving off its stake in OM Sarawak, which has been benefitting from the strong ferroalloy prices?

       CMS, which is 23.2% controlled by the Taib family of Sarawak, is a diversified group with core businesses in cement, building materials and road maintenance and construction.

       According to an analyst, the group has been looking to streamline its (business) portfolio under Datuk Seri Sulaiman Abdul Rahman Taib, who returned to the helm in the middle of 2021.

       “The divestment is an opportunity to unlock value and improve its financial metrics as the group emerges from the Covid-19 pandemic.

       “Proceeds can be channelled for its other business such as MPAS, which is a new growth catalyst,” says one analyst. The analyst notes that while profits have come in for OM Sarawak in 2021, the performance has not been consistent and subject to the volatile nature of commodity prices.

       “So, it’s more meaningful for the group to focus on MPAS where it has invested quite a bit and has majority control,” the analyst adds.

       From an environmental, social and governance (ESG) perspective, MPAS is also in line with CMS’ long-term ESG plan.

       Towards this end, MPAS is believed to be working towards ESG certification, while sukuk going forward would also be ESG-based.

       In a recent report, RAM Ratings noted that OM Sarawak had turned around in 2018, but dipped into losses in 2019 and 2020 due to fluctuating commodity prices and demand.

       For the nine-month period of the financial year ended Dec 31, 2021, its performance rebounded with a contributed share in profits of RM40.52mil, driven by the recent strong prices.

       But with prices of ferrosilicion and silicon manganese having moderated from their 2021 peaks, the company’s performance in FY22 is likely to soften, reckon some analysts.

       Although the planned divestment would strengthen CMS’ capital position, it would result in a near-term earnings gap.

       TA Research says that based on its rough estimates, the disposal would “result in up to a 30% FY22 earnings per share reduction for CMS”.

       “Therefore, we believe it will take some time for the group to fill up the earnings vacuum,” it adds in a report. TA Research says it is not making a change to its FY22-FY24 earnings projections, pending shareholders’ approval of the proposed disposal.

       As for the US$120mil (RM524.82mil) price, TA Research says it is fair and would translate to an acquisition price earnings ratio (PER) of about six times FY21 earnings.

       “While the offer PER of six times looks cheap, we think it was distorted by the exceptionally robust earnings in FY21, thanks to the high average selling prices of steel throughout 2021.

       “Therefore, if we use our projected earnings in FY22 for OM Sarawak, the acquisition PER will translate to about nine times, which is in line with the sector valuation of building materials in Malaysia,” TA Research points out.

       On the proceeds, TA Research says it could be used to kick-start the operation of phase one of the integrated phosphate plant, slated in the months ahead.

       Construction of the first phase of MPAS’ three manufacturing plants, costing close to RM900mil, was delayed for almost two years due to technical hiccups and movement restrictions related to Covid-19.

       Alternatively, TA Research adds that CMS may opt to use the proceeds to pare down borrowings.

       Assuming all of it goes for this, TA Research says that CMS will become net cash of RM167.9mil as compared to a net debt position of RM352.8mil as of the fourth quarter of FY21.

       CMS had upped its stake in MPAS from 49.94% to 60% in early 2019.

       MPAS has been incurring higher losses due to an increase in its headcount in preparation for the start of operations, an analyst notes.

       Elsewhere, the group owns 18.6% of Kenanga Investment Bank Bhd and 17.9% of KKB Engineering Bhd.

       It also owns a 50% non-controlling interest in Sacofa Sdn Bhd – a telecommunication infrastructure provider.

       Shares in CMS closed one sen lower to RM1.11 yesterday, giving the stock a market capitalisation of RM1.19bil.