CMS investigations leads to governance risk pricing

The Sarawak-based diversified company has hired an independent consultant to investigate the losses recorded at its Pan Borneo project

by NUR HAZIQAH A MALEK / Pic credit:

CAHYA Mata Sarawak Bhd (CMS) plans to undertake an internal investigation into allegations involving its management and project execution following the suspension of its group CFO Syed Hizam Alsagoff hoping it will to some extent help shore up investor concerns of the company.

The Sarawak-based diversified company has hired an independent consultant to investigate the losses recorded at its Pan Borneo project and to review the group’s control system and risk mitigation framework, Maybank Investment Bank Bhd noted in a recent report.

“The findings, in our view, could take a while. Pending its outcome, we are tagging on a governance risk factor to our valuation.

“Our revised RM1.75 target price (previously RM2.50) is based on 0.7 times our revalued net asset value estimate,” said Maybank’s director and equity market research head Wong Chew Hann stated.

Two cases were announced in relation to the company, but the losses recorded at the Pan Borneo operations were the trigger for the investigation.

The Pan Borneo Highway Phase 1 contract worth RM1.36 billion was awarded to a joint venture (JV) 70%-owned by CMS, PPES Works (Sarawak) Sdn Bhd with Bina Puri Sdn Bhd the remaining 30%.

PPES Works was a 51% subsidiary of CMS initially, but it is now down to 49% after the sale of 2% stake to Sarawak Economic Development Corp in October 2020.

What triggered the case in-point was Pan Borneo’s contract and construction losses at PPES Works, though at the 70 to 30 JV level, the project is still profitable, Wong noted.

The suspension of the group CFO occurred on May 5 with immediate effect for 30 days came also around the same time of an allegation of conflict of interest involving its deputy group chairman Datuk Seri Mahmud Abu Bekir Taib and former CIO Karl Vink, which surfaced on April 22.

Wong added that in a recent briefing with analysts, CMS MD Datuk Isaac Lugun said the two cases were unrelated and CMS’ board is satisfied that the allegation involving its deputy group chairman has no basis and he will continue his service.

Wong added that the company’s board is now drawing the terms of reference (ToR) to appoint a consultant.

“The target is for an appointment by mid-May 2021. As the ToR would include a review of the group’s control system and risk mitigation measures to ensure no future recurrences, we think that the consultant’s work could take a while,” Wong explained.

She added that a potential share buyback exercise may cap CMS’ share price’s near-term downside.

“The upside swing factors of the company include rollout of major infrastructure projects which will be positive for its cement, construction materials and trading, and construction and road maintenance operations.

“Sizeable land sale and upswing in commodity prices are among the factors, too,” she said.

Downswing factors for CMS’ share price include work delays on its existing Pan Borneo Highway package and in the major infrastructure projects.

“The volatility in raw material prices will impact earnings of CMS’ cements and construction materials and trading operations, while significant swings in ferro silicon prices could affect the earning contribution.

“There are also governance issues following the investigations into matters involving its group CFO,” she warned.