Investment Highlights

• We cut our FY20–22F net profit forecast by 50%, 29% and 22% respectively and reduce our FV by 23% to RM1.42 (from RM1.84 previously) based on a rolled-over 10x FY21F EPS (from FY20F), in line with our benchmark forward target P/E of 10x for mid-cap construction/building materials stocks. Maintain UNDERWEIGHT.

• Cahya Mata Sarawak’s (CMS) 1QFY20 core net profit of RM17.3mil came in below expectations, at only 16% of our full-year forecast and 14% of full-year consensus estimates respectively. We believe the key variance against our forecast came from weaker-than-expected performance across the board due to the movement control order (MCO).

• The company’s 1QFY20 core net profit dropped 58% YoY mainly due to lower contributions from the construction and road maintenance (as road length maintained effective 1 January 2020 has been almost halved compared to a year ago), property division (due to the soft property market) and associates’ contributions. However, the lower net profit was partially mitigated by a 69% YoY improved performance from the cement division attributable to cheaper imported clinkers and higher in-house clinker production.

• Associates contributions that came largely from its 25%– owned OM Materials slid 15% YoY mainly due to the lower production of ferrosilicon (FeSi) (caused by the shutdown of two FeSi furnaces in early Feb 2020) and manganese alloy (in response to weak demand).

• 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 and reduced petroleum revenues. In Sarawak, while the state could step in to fill the gap with the RM11bil state reservesfuelled 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.

• We are mindful of the potential threat to the market dominance of existing players in the construction and building material sector in Sarawak on an altered political landscape. Increased competition could put a dent on CMS’ prospects of winning new construction jobs and concessions, as well as sustaining high margins for its construction, road maintenance and cement businesses.

Source: AmInvest Research - 1 Jul 2020