CMSB

I haven't really looked that deeply into this company, but it is really a case of something popping out at me as a good deal. I remember Mohnish Pabrai talking about this method of investing. You want something that really pops out at you as a great investment. An example of this may very well have been an old idea to invest into the Greek banks somewhere in the 2021's, the entire banking system in Greece was trading at less than the market capitalization of CIMB Bank (About 10billion euroes for all 4 of the systemic banks that comprised the entire banking system in Greece, post recapitalization), the economy had been showing signs of growing green shoots since the early 2017's and Piraues Bank had gone through a last recapitalization somewhere in 2022 or 2023. Piraeus Bank then saw a 4 fold increase in share price from .90 euro to somewhere around 4 euroes. I had a whole investment thesis on this that has already unfolded. I missed the boat because my funds was stuck in OM Holdings.

The main business of CMSB is a cement monopoly in east Malaysia, the cement market in Malaysia was weak from 2015 till 2021, the rest of the cement producers in Peninsular Malaysia have gone through a consolidation by YTL Cement and have been renamed Malayan Cement, it has since gone up in price. 

Unlike many other commodities, cement cannot be easily exported, hence there are regional markets for cement, a cement plant in one location cannot easily export their products to say another region 1000 kms away across the sea because cement is cheap and logistics cost money. However, despite this, the downturn in cement since 2015 has been felt both in peninsular and east Malaysia. The culprit may very well have been a downturn in the property market felt throughout the country.

Despite the recovery of the cement sector, CMSB has not seen a recovery in their share price. The reason for this is their investment in Malaysian Phosphates. 

A quick introduction, 

Cahya Mata Phosphates (formerly Malaysian Phosphates) is an investment into a fertilizer plant in the Samalaju Industrial park, if this industrial park sounds familiar, it's because its the same industrial park that OM Holdings and Press Metal operates in, and it has the same cost advantages as they have. Mainly access to cheap electricity (OMH 3.5cents usd per Kwh). This was originally a 40:40:20 joint venture between CMSB, Malaysian Phosphates (The operator), and a company linked to tradewinds. However due to financing issues it became CMSB 60% with the remainder spread across the other 2 shareholders, before Malaysian Phosphates finally got kicked out of the picture and CMSB holding 80% of the fertilizer plant. 

The samalaju joint venture has been plagued with mismanagement, the latest being the lawsuit between Cahya Mata Phosphates and SESCO, where there are certain terms within the PPA(Power Purchase Agreement) that Cahya Mata Phosphates refuses to abide by. I am unclear as to the exact terms, however I do believe it has to do with the postponement of the PPA, as the project has been plagued by delays, originally scheduled to be operational somewhere around 2019, construction has been postponed until 2022, power was cut off and I do believe that the fertilizer plant may not be operational at this point. As of 3rd quarter 2024 of their financial results, the phosphate plant has contributed about 125million MYR in losses.

The following is the 3rd quarter 2024 Segmental results so I can better explain the financial figures.

Note the Bolded part. This is only for the 9 months ended 2024.

The largest profit contributor is the cement division, followed by the oil tools division, the road maintenance division and the Strategic Investments (Sacofa)

Despite the 125million in losses by the phosphates division, they are still making about RM46million in profit. This means, excluding the 125million in losses. they would have made about RM 170million in profit for the 9 months ended FY2024. Annual profits would likely be RM200million+. It's an absolute cashcow. 

Why doesn't management forego the lawsuit and just run the phosphate plant without incurring what is likely going to be over RM300million in losses? Because that is what incompetent management does. But they won't be able to do it forever. Sooner or later, the Phosphate plant will become operational. In the interim, the extremely high losses of Cahya Mata Phosphates means that the share price of CMSB is getting pounded in the stock market.

Note the market cap of RM1.13B market capitalization. Now here is snapshot of the balance sheet of CMSB in 3rd quarter 2024.

The cash holdings is about RM414mil, Total Loan and borrowings is about RM221million. So CMSB is essentially in a net cash position of about RM195million.

So some of the very interesting facts to know.

The phosphates plant took a capital investment of almost RM1bil to construct

They sold off their 25% stake in OM materials for RM500mil a few years back.

Their market cap minus of their net cash position would come to about RM900million. 

This doesn't include the 2 other major profit generators of the Cement plant and the oiltools division. Which contributed almost MYR150million in profit in 3 quarters for 2024.

Note that the Phosphates division, despite the heavy losses, are low cost due to their access to cheap electricity, the worry here is whether the phosphates division will be able to operate the completed smelter as there are so many corporate governance issues with CMSB that it is unable to operate the phosphate plant in a profitable manner. But it looks like they are adding in competent ppl. There was a recent appointment of an independent non executive director from Khazanah in CMSB.

Just excluding the Phosphates division would put CMSB at a PE of less than 5 for 2024. I wouldn't be surprised if it continues to fall because the phosphate division is continuing to lose money as it is not operational.

The investment thesis is really the turnaround of the phosphate plant from loss making to profit making. Even a return on investment of 5% on the RM1billion construction cost would put an additional RM50million to the bottomline of CMSB. It is definitely possible as they have access to cheap electricity. The problem is whether they can actually get the fertilizer plant up and running.

If they choose the path of litigation this may very well go on for a few more years. However that path is insane, as the current losses a year are in the excess of RM100million.

In conclusion, an investment into CMSB may be a great investment provided the stake in the phosphate plant turns around into a successful business. Its a good idea to wait for the turnaround to occur first before investing into CMSB. The phosphate business is attractive because this is a clone of the Press Metal business model. That which is the indirect export of cheap electricity.