Investment Highlights

• We raise our FY20–22F net profit forecasts by 22%, 9% and 9% respectively and increase our FV by 9% to RM1.24/share (from RM1.14/share previously) based on 8x revised FY21F EPS, in line with our benchmark forward target P/E of 8x for small-cap construction/building material stocks. Maintain UNDERWEIGHT.
• CMS’s 9MFY20 core net profit of RM80.8mil came in above expectations at 81% and 82% of our and consensus fullyear forecasts respectively. We believe the key variance against our forecast came from a better-than-expected rebound in its cement and trading divisions in 3QFY20.
• CMS’s 9MFY20 core net profit plunged 48% YoY mainly due weaker performance across the board. Cement recorded a sharp 34% fall in operating profit as clinker production was partially disrupted during the height of the pandemic. Not helping either, the demand for cement also dropped significantly on the back of an almost complete halt in construction activities during the period. Likewise, construction and road maintenance suffered following the reduction by almost half the road length under maintenance since 1 Jan 2020 while its property division underperformed due to the soft market.
• Meanwhile, associate contributions (driven largely by 25%-owned OM Materials) slid 20% YoY in 9MFY20. Sales volume of ferrosilicon (FeSi) fell 25% YoY as only six out of a total of ten FeSi furnaces were running. Of the remaining four FeSi furnaces, two were idled while the remaining two were placed on regular maintenance since 2QFY20. Sales volume of manganese alloy, an input in the steel production, dropped 17% due to a weaker global market demand for steel. Overall, we estimate that OM Materials suffered minor losses in 9MFY20.
• We maintain our view that given the still elevated national debt, the government has very limited room for fiscal manoeuvre. Already, S&P Global Ratings downgraded Malaysia’s outlook to negative from stable in June 2020 to reflect a heightened risk of fiscal deterioration, weighed down by the economic impact of the Covid-19 pandemic, depressed oil prices and fiscal stimulus.
• 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.
• We are mindful of the potential threat to the market dominance of existing players in the construction and building material sector in Sarawak on the back of an altered political landscape in Malaysia after the 14 th general election. 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 - 26 Nov 2020