MIDF Sector Research

Author: sectoranalyst   |   Latest post: Fri, 19 Jul 2019, 10:02 AM


Cahya Mata Sarawak - Contract Renewal Came at No Surprise

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  • CMSB has received a letter informing that its road maintenance contract has been extended
  • The new contract duration is for the period of six months
  • Positive on the news, given its prospect in earnings contribution
  • Maintain BUY call on the stock with a TP of RM3.85

CMSB has received a letter from the Government of Sarawak informing that its road maintenance contract has been extended for a period of six (6) months from 1 July 2019 to 31 December 2019 on the same terms and conditions.

Business as usual. We understand that it is a renewal of an existing contract with the state government. Accordingly, there is no additional business and commercial risks to be assumed by the company arising from the contract extension.

Contract duration. The contract period is for six months from 1 July 2019 to 31 December 2019. Altogether, the contract is worth RM94m in earnings prospect that will positively contribute to CMSB bottomline.

The management had earlier expressed confidence of receiving this extension. To recall, its previous renewal had commenced in July 2018, which carries RM180 million worth of contract extension up until June 2019. To note, the company currently maintains 6,260km of state roads, as well as 680km of federal government roads within Sarawak. Moving forward, the company was also eyeing more state road concession that stretch to about 30,000km.

Expected to play dominant role. Moving forward, we believe the company is well positioned to maintain its dominant role in the state’s road maintenance operations. This was on the back of its proven track record and cost advantages, built up over the years.

No change to forecast. We make no change to our forecasts, as we have previously taken into account the possible contract extension.

Recommendation. We maintain our BUY call on the stock with a TP of RM3.85. This is after ascribing blended PER multiples between the range of 8-12x for construction, roadworks and other associated divisions.

Source: MIDF Research - 25 Jun 2019

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Chart Stock Name Last Change Volume 
CMSB 2.89 -0.07 (2.36%) 1,524,600 

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