Investment Highlights

• We maintain our net profit forecasts, but increase our fair value (FV) by 33% to RM2.43/share (from RM1.83/share previously) based on a rolled-over 12x revised FY22F EPS (from 10x FY21F EPS previously). We now perceive CMS as a mid-cap construction/building material company (from small-cap previously) following a significant share price appreciation in recent months that has rendered it more investable to large institutional funds. The 12x forward PE is in line with our benchmark target forward target for mid-cap and large cap construction/building material stocks. Despite our higher FV, its share price upside is capped. Downgrade to HOLD from BUY.

• CMS’s FY20 core net profit of RM99.7mil (adjusted predominantly for disposal gains and a few major impairments) missed expectations at only 82% and 89% of our forecast and consensus estimates respectively. We believe the key variance against our forecast came from worse-than-expected performance across the board.

• CMS’s FY20 core net profit dropped 38% YoY mainly due weaker performance across the board. Cement recorded a sharp 34% fall in operating profit, we believe due to: 1) the disruption in clinker production during the height of the pandemic; 2) the lack of demand for cement on the back of an almost complete halt in construction activities during the period; and 3) CMS’s clinker plant was put offline for maintenance along with the phase 2 upgrade. Meanwhile, construction and road maintenance bore the full impact of the reduction by almost half the road length under maintenance since 1 Jan 2020 while its property division languished amidst a soft property market.

• Meanwhile, associate contributions (driven largely by 25%-owned OM Materials) slid 18% YoY in FY20. Sales volume of ferrosilicon (FeSi) tumbled 28% YoY as only six out of a total of 10 FeSi furnaces were in operation. 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, shrank 4% due to a weaker global market demand for steel. Overall, we estimate that 25%-owned OM Materials suffered losses of about US$20.0mil for FY20.

• We maintain our view that the government will have very limited room for fiscal manoeuvre in 2021 given the elevated national debt, even before the pandemic. The government’s fiscal position has been weighed down further by the economic impact of the pandemic (including reduced tax and petroleum revenues), as well as the massive relief spending to cushion the economic impact of the pandemic. All these have culminated in Fitch Ratings’ Dec 2020 downgrade of Malaysia’s long-term foreign-currency issuer default rating to ‘BBB+’ from ‘A-‘, on the heels of S&P Global Ratings’ June 2020 downgrade of Malaysia’s outlook to negative from stable).

• Under these circumstances, we believe the government is unlikely to roll out new public infrastructure projects in a major way over the short term. Also, given the suspension of parliament following the declaration of a state of emergency until 1 Aug 2021, the tabling of the 12th Malaysia Plan (which, among others, will earmark mega public infrastructure projects to be implemented in 2021–2025) scheduled for March 2021 could now be put on the back burner.

• In Sarawak, on a brighter note, there is a fair chance that 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). However, at current valuations of 11–13x forward earnings, we believe the upside to the share price is capped.

Source: AmInvest Research - 26 Feb 2021