Investment Highlights

• We maintain our FY19F net profit forecast, but trim our FY20–21F numbers by 5% and 2% respectively. We reduce our FV by 5% to RM2.03 (from RM2.14 previously) 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, through its 51%-owned PPES Works (Sarawak) Sdn Bhd (PPES), has been granted by the Sarawak state government a 10-year (1 Jan 2020 to 31 Dec 2029) performance-based contract to maintain 3,301km state roads in Sarawak with an estimated contract value of RM99.2mil annually.

• We have a mixed view on the latest development. On one hand, CMS finally gets a long-term renewed contract to maintain Sarawak state roads (after three short-term extensions of between 6 and 12 months over the last two years, following the expiry of the original 15-year contract in Dec 2017). On the other hand, the renewed contract covers only 3,301km vs. 5,847km under the original contract. We also notice that the contract is now parked under the 51%-owned PPES vs. a 100% subsidiary previously.

• Our earnings downgrade is largely to reflect the share of profits attributable to the minority shareholder of PPES. We have previously factored in the risk of CMS getting a smaller contract (in terms of km-length) as we expected the Sarawak state government to introduce more competition in the state road maintenance space.

• 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 - 9 Dec 2019