Investment Highlights

• We raise our FY19F net profit forecast 6% and marginally for FY20–21F. We tweak our FV up by 1 sen to RM2.14 based on 10x revised FY20F EPS, in line with our benchmark forward target P/E of 10x for large-cap construction/building materials stocks. Maintain our UNDERWEIGHT call for Cahya Mata Sarawak (CMS).

• CMS’ 9MFY19 core net profit came in slightly above expectations at 83% and 81% of our full-year forecast and full-year consensus estimates respectively. We believe the variance against our forecast came largely from higherthan-expected performance from its building materials trading division.

• The company’s 9MFY19 core net profit dropped 26% YoY mainly due to lower contributions from the cement division (due to higher input cost of clinker), construction and road maintenance (due to cost escalation and expiry of federal road maintenance in 3QFY18), property division (due to the soft property market) and associates. However, the lower net profit was partially offset by a 34% YoY improved performance from the building materials division backed by RM9mil of write-backs.

• Associates contributions that come largely from the 25%- owned OM Materials, plunged 44% YoY mainly due to: (1) a 25% YoY fall in the average of selling price (ASP) of its key product ferrosilicon (FeSi) to US$980/tonne in the 9MFY19 from US$1,300/tonne in the 9MFY18; and (2) a 3% YoY decline in sales volume for manganese alloy to 180K tonnes in the 9MFY19 from 186K tonnes in the 9MFY18.

• 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 for FeSi and manganese consuming industries in China.

• We remain cautious on the outlook for the construction sector. The government has very limited room for fiscal manoeuvre given the still elevated national debt. In Sarawak, while the state could step in to fill the gap with the RM11bil state reserves-fuelled infrastructure projects comprising the Coastal Road, Second Trunk Road and 11 mega bridges (ahead of the state election which must be held by Sep 2021), the rollout of work packages from these highly publicised projects seems to have hit a snag after the initial hype.

Source: AmInvest Research - 27 Nov 2019