Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and FV of RM2.51 for Cahya Mata Sarawak (CMS) based on 10x FY20F EPS, in line with our benchmark forward target P/E for large-cap construction/building materials stocks.

• We came away from an analyst briefing yesterday feeling cautious on the company’s outlook largely due to the earnings risk arising from the volatility in input cost (clinker) and selling prices (OM Materials’ products). On a brighter note, the prospects of its construction and road maintenance businesses appear stable over the immediate term.

• CMS guided for PBT in excess of RM100mil from its cement division in FY19F (vs. about RM90mil in FY18 and our FY19F forecast of RM96mil). The better performance will be driven largely by the absence of major plant maintenance shutdown. Also, CMS believes the price of imported clinkers from China/Vietnam (CMS imports about 50–60% of its clinker requirement, with the balance 40– 50% being produced in-house) has peaked at about US$54/tonne (vs. US$35–36/tonne normally). However, we believe that the price of imported clinkers could stay elevated for longer (which we are assuming) as the new and cleaner capacity may not come in soon enough to fill the vacuum left by the decommissioning of the obsolete and highly polluting capacity in China (due to stricter environmental policies).

• The outlook for its 25%-owned OM Materials is not favourable given the weak price of about US$1,170/tonne for its key product, i.e. ferrosilicon (FeSi), at present, vs. the production cost of US$1,000/tonne. Apart from the supply pressure from China (due to new capacity), the demand for the commodity in China is also weakening against a backdrop of a slowing economy in China on the back of the escalating US-China trade war.

• CMS is bullish on the outlook for its construction division, driven largely by state-funded public infrastructure projects in Sarawak in the run-up to the 2021 state election. CMS is currently eyeing two more packages from the coastal road and second trunk road projects. It is also confident that it will be able to secure an extension for its road maintenance concessions which will end in June 2019.

Source: AmInvest Research - 17 May 2019