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.

• CMS has been granted an extension for the maintenance of the 5,847km state roads for 6 months from 1 July 2019 to 31 December 2019, based on the existing terms and conditions, with an estimated sum of RM94mil.

• The extension is a short-term measure pending the negotiation and finalisation for the renewal of the concession on a longer term basis. Recall that CMS has been awarded a 15-year contract of state road maintenance in April 2003, and a short-term extension of the contract in December 2017 and June 2018 for 6 months and 1 year respectively.

• We have taken into account the extension in our forecasts. We project the state road concession to contribute RM8.4mil or about 3% of total net profit in FY19F.

• 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 reserve of Sarawak. In any case, we believe that the market could have adequately priced in the potential of a state reservesfuelled infrastructure boom in Sarawak (ahead of the Sarawak state election which must be held by Sep 2021) with CMS share price having recovered strongly from the year-low of RM1.92.

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

Source: AmInvest Research - 25 Jun 2019