Investment Highlights

• We downgrade our call for Cahya Mata Sarawak (CMS) to UNDERWEIGHT from BUY. We raise our FY18F net profit forecast by 20% to largely reflect better performance from OM Materials but cut FY19-20F earnings by 5% and 14% respectively on the weakened prospects for the construction and building materials sectors in East Malaysia. We reduce our FV by 37% to RM2.48 (from RM3.91) based on 10x revised FY19F EPS, in line with our benchmark forward target P/E for large-cap construction/building material stocks.

• Having recovered by a whopping 59% to RM3.05 from the post-14th general election (GE14) low of RM1.92 on 21 May 2018, we believe the stock’s risk premium could now have overshot to the downside (vs. overshooting to the upside previously).

• We have identified three potential drivers/dampeners to CMS’ performance over the short to medium term: 1. The cutback in public infrastructure spending nationwide, including East Malaysia; 2. The change in the competitive landscape for the construction and building materials sectors in East Malaysia following the change in the political landscape after GE14 in 2018, coupled with the Sarawak state election by Sept 2021; and 3. The performance of CMS’ various associates, particularly, the 25%-owned OM Materials.

• The Sarawak state government has an ambitious plan for public infrastructure spending, including the construction of a new coastal highway and the second trunk road (both multi-billion ringgit projects), which will translate to construction jobs for contractors and demand for building materials.

• However, given the scale and size of the projects, we believe it will need funding support from the federal government. We are mindful that this will be a major challenge given: (1) the federal government’s adherence to fiscal prudence and sustainability, resulting in a significant cutback in public infrastructure spending across the nation; and (2) Sarawak will have to compete with other states in Malaysia, which are equally hungry for federal funding to finance their respective projects.

Source: AmInvest Research - 12 Feb 2019