Investment Highlights

• We maintain our UNDERWEIGHT call, forecasts and FV of RM2.14 for Cahya Mata Sarawak (CMS) based on 10x FY20F EPS, in line with our benchmark forward target P/E of 10x 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: (1) a weaker cement division; (2) the introduction of competition in the state road maintenance space; and (3) weaker performance from 25%-owned OM Materials due to depressed selling prices of its end products.

• CMS guided for a soft FY19F for its cement division due to: (1) higher maintenance cost (est. at RM45mil) due to the aging clinker plant with a capacity of 900k tonne per annum; and (2) the elevated cost for input clinker at average of US$53–55/tonne (vs. US$35–36/tonne normally). The company only produces 40–50% of its clinker requirement, with the balance 50–60% imported from Vietnam. We reiterate our belief that the price of imported clinkers could stay elevated for longer 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 company also guided for the introduction of competition in the state road maintenance space with the entry of “two other players” (which we already forewarned in our previous reports). However, it is confident that it will in FY20F secure at least 50% of the maintenance contracts for state roads spanning over 5,874km upon the expiry of its existing extension on 31 Dec 2019. CMS also expects lower margins as a result of competition. In FY18, construction and road maintenance contributed about 20% to CMS’ total earnings.

Source: AmInvest Research - 29 Nov 2019