CAHYA MATA SARAWAK ANNUAL REPORT 2016

www.cmsb .com.my Section 03 P E R F O RMAN C E 2 0 1 6 Cahya Mata Sarawak Berhad 32 Moving forward, CMS Opus will continue to seek to expand its FUM and to identify appropriate investments while strengthening and retaining its pool of expert talent. It will also look at achieving profitable exits from its investee companies where it makes sense to do so. BUSINESS RISKS As CMS ventures forth amidst difficult market and operating conditions, we are aware of certain risks that we may be exposed to, particularly as a result of global uncertainties that could impact our operational and financial performance. We outline our key risks below, as well as our respective risk mitigation strategies. Risk #1 - Strategic Risk: Flawed strategic business development/investment strategies and execution Even as the Group considers participating in investment opportunities both within its existing businesses, within its portfolio of strategic investments and beyond, it may be exposed to flawed strategic choices or direction, flawed investment decisions and flawed execution. To mitigate these risks, the Group has identified mitigation actions which include: seeking external advice and data which is cross-verified; carrying out proper feasibility studies with third party consultants involved; and working closely with proven joint venture/strategic partners who have both industry knowledge and can make the appropriate financial commitment. On top of this, we ensure measures such as a multi-tiered approval process and a Project Risk Scorecard reviewed, approved and periodically updated by the relevant Group Board, among other things, are in place in every new venture. Risk #2 - External Risk: Adverse economic and market conditions affecting the main markets of energy-intensive industries in Sarawak Whilst the Group has strong confidence in its two energy- intensive industry investments at the SIP, namely OM Materials (Sarawak) Sdn Bhd, OM Materials (Samalaju) Sdn Bhd and Malaysian Phosphate Additives (Sarawak) Sdn Bhd, as well as Samalaju Properties Sdn Bhd, we acknowledge that these operations can be affected by adverse economic and market conditions. These may include the fluctuation of global commodity prices, as well as overall market supply and demand. Recognising that very limited mitigation actions can be done to materially downgrade this risk, the Group aims to reduce this risk by putting in initiatives, in relation to the two industrial plants, to carefully evaluate and limit CAPEX to only critical items. At the same time, we are taking measures to improve the overall efficiency and productivity of the plants to minimise operating costs and improve profit margins. This risk is further mitigated by the competitive power prices which are a major cost of production and which ensure these two plants are in the first quartile of production costs when measured against their competitors. With regard to risks pertaining to Samalaju Properties such as the slow take up of space at the SIP among other things, we have identified mitigation actions which include CAPEX deferrals, reductions to land premiums payable, strictly controlling costs and editing product offerings so as to customise prices and supply to be in line with market demand and trends. Risk #3 – Financial Risk: Funding risks for large-scale projects and/or investments (projects) The Group’s ability to fund is crucial to existing and future projects as failure in obtaining sufficient project funding may lead to delays in project implementation/completion, as well as may impact negatively on the Group’s financial position and its reputation. This is all the more important particularly during recessions and slowdowns in the global economy. It is then that obtaining project funding from financial institutions becomes challenging, in terms of availability of funds, as well as with regard to the terms and rates offered. Tomitigate this, prior to entering into any such projects, the Group will conduct feasibility studies and due diligence exercises to ensure that these projects are viable and able togeneratesufficient cashflowreadily tomeet their financial obligations. We will also ensure that we (and any of our joint venture partners) have sufficient financial resources to meet our share of a project’s funding requirements, as well as any reasonably foreseeable contingency. Apart from this, the Group is constantly engaging with and communicating effectively with our bankers to ensure positive relationships with them, so that our bankers will have a better understanding of our projects and thus be more willing to lend us their support. To further mitigate this risk, the Group is also prudent in its financial planning to ensure its gearing levels are kept within defined ratios and its cash reserves are sustained through judicious management of its free cash flows and its capital commitment. The Group is also finalising plans to put into place long-term funding through a RM2.00 billion 20-year Sukuk Ijarah and/or Murabahah programme. Risk #4 – External Risk: Adverse changes in the political landscape and government policies There is today an increasing destabilisation in what was generally once an increasingly stable world where trans- border collaboration and trade was leading towards a globally integratedeconomy.This has started tochange the dynamics of international trade and political relationships leading to more uncertainty. Within Sarawak, leadership changes have inevitably resulted in policy shifts which the Group needs to factor into its strategies. Developments on the political and regulatory fronts may affect the growth and sustainability of the Group both in the short and in the longer-term at different levels. Even though the Group has visibly positioned itself as an ally supporting the State’s overall economic development, thanks to its extensive MANAGement DISCUSSION AND ANALYSIS