Investment Highlights

• We cut our FY20–21F net profit forecast by 14% and 5% respectively and reduce our FV by 9% to RM1.84 (from RM2.03 previously) based on 10x revised FY20F EPS, in line with our benchmark forward target P/E of 10x for largecap construction/building materials stocks. Maintain our UNDERWEIGHT call for Cahya Mata Sarawak (CMS).

• CMS’ FY19 core net profit of RM157.6mil came in below expectations, missing our forecast by 19% and consensus estimates by 18% respectively. The key variance against our forecast came from weaker-than-expected performance across the board.

• The company’s FY19 core net profit dropped 44% YoY mainly due to lower contributions from the cement division (due to higher input cost of clinker), construction and road maintenance (due to upward revision in costs for the PBH project and cost escalation), property division (due to the soft property market) and associates’ contributions. However, the lower net profit was partially mitigated by a 31% YoY improved performance from the building materials division attributed to a RM14.8mil reversal of provisions.

• Associates contributions that came largely from 25%– owned OM Materials, plunged 43% YoY mainly due to: (1) weak selling prices for its key product ferrosilicon (FeSi); and (2) a lower sales volume for manganese alloy. The weaker FeSi selling prices and sales volume of manganese alloy were largely due to the double whammy 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. Not helping either, is the current political impasse at the national level that could stall the award of public projects. 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 Feb 2020