Investment Highlights

• We raise our FY19–20F net profit forecasts by 7–10%, increase our FV by 5% to RM2.60 (from RM2.48) but maintain our UNDERWEIGHT call for Cahya Mata Sarawak (CMS). Our new FV is based on 10x revised FY20F EPS, in line with our benchmark forward target P/E for large-cap construction/building material stocks.

• The earnings upgrade is to reflect: (1) an assumption for new construction job wins of RM500mil in FY19F and; (2) slightly better sales volumes and margins for its cement and building material divisions.

• We maintain our view that a sustainable funding model for public infrastructure development in Sarawak is by tapping into federal funds vs. draining the state reserves of Sarawak.

• In any case, we believe the market could have adequately priced in the potential of a state reserves-fuelled infrastructure boom in Sarawak (ahead of the Sarawak state election by Sep 2021) with CMS share price having recovered by a whopping 77% from the year-low of RM1.92. We believe the tell-tale sign is the muted share price reaction to CMS’s announcement on 13 March 2019 of it winning the RM466.7mil Bintulu-Jepak bridge project via a JV between its 51%-owned unit PPES Works and China Communications Construction Company (CCCC). The award of this contract was supposed to herald the state reserves-fuelled infrastructure boom in Sarawak.

• Meanwhile, we believe CMS, being a work package contractor (WPC) for the RM1.36bil Sg Awik-Bintangor junction stretch of the Pan Borneo Highway (via 70:30 JV with Bina Puri), will not be affected by the potential change to the project’s execution based on the project delivery partner (PDP) model. This is because: (1) there has not been talks on potential reduction of scope for the project (unlike the MRT2 and LRT3); and (2) CMS, alongside with other WPCs for the project, have secured their work packages on highly competitive bids, leaving themselves little room for excessive profits. At present, CMS’ package is 30% completed.

• We remain cautious on CMS due to the cutback in public infrastructure spending as the federal government tightens its belt. We are also mindful of the potential threat to the market dominance of existing players in the construction and building material sectors in Sarawak on an altered political landscape in Malaysia post the 14th general election. Increased competition could put a dent on CMS’ prospects of winning new construction jobs, securing extensions or its road maintenance concessions, as well as sustaining high margins for its construction, road maintenance and cement businesses.

Source: AmInvest Research - 4 Apr 2019