Investment Highlights

• We cut our net profit forecast for FY19F by 11%, FY20F by 13% and FY21F by 15% and reduce our FV by 13% to RM2.13 (from RM2.45 previously). We 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 of 10x for large-cap construction/building materials stocks.

• CMS’ 1HFY19 net profit came in below expectations at only 40% and 36% of our full-year forecast and full-year consensus estimates respectively. We believe the variances against our forecast came largely from weakerthan-expected performance from the cement and road maintenance divisions, coupled with lower associate contributions.

• The company’s 1HFY19 net profit tumbled 37% YoY mainly due to lower contributions from the cement division (higher input cost of clinker), construction and road maintenance (cost escalation and expiry of federal road maintenance in 3QFY18) and associates. This was partially offset by the improved performance from other building materials (due to RM9mil write-backs) and the property division (due to RM10.8mil profits from land sales to Sealink International and a higher number of condominium units and apartments sold).

• Associate contributions that come largely from the 25%- owned OM Materials plunged 89% YoY mainly due to: (1) a 23% YoY drop in the average selling price (ASP) of its key product, ferrosilicon (FeSi) to US$1,080/tonne in the 1HFY19 from US$1,320/tonne in the 1HFY18; and (2) a 7% YoY drop in sales volume for manganese alloy to 112k tonnes in the 1HFY19 from 120k tonnes in the 1HFY18.

• The weaker FeSi ASP and sales volume of manganese alloy for OM Materials were largely due to the doublewhammy of rising supply and slowing demand in China amidst the US-China trade war, coupled with stricter environmental policies in China.

• 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 its 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 business.

Source: AmInvest Research - 28 Aug 2019