Investment Highlights

• We maintain our HOLD recommendation, net profit forecasts and fair value of RM2.43/share based on 12x FY22F EPS, in line with our benchmark target forward target for mid-cap and large cap construction/building material stocks. There is no adjustment for ESG based on a 3-star rating as appraised by us (Exhibit 1).

• Key highlights from analyst briefing of CMS yesterday are:

1. While CMS appeared bullish on construction job wins (ahead of the Sarawak state election which must be held by Sep 2021), it fell short of providing specific details such as the nature, value and timing of the award of potential jobs.
    
2. First started in Oct 2020, maintenance work at its clinker plant is on track for completion in 1Q2021. Recall, CMS is ramping up its clinker production capacity from 625K tonnes at present to 750K tonnes after its phase 2 upgrading, and a further to 800K tonnes under Phase 3 in 2022. The rationale is to reduce its reliance on imported clinker of which prices could be quite volatile, hurting its cement division’s margins. Upon the completion of the entire plan, we estimate that CMS’ dependence on clinker imports (largely from Southeast Asia and Peninsular Malaysia) will decline to 45–50% from 60%. We understand that the sizes of the clinker and cement markets in Sarawak are about 1.4mil and 1.7mil tonnes annually respectively.
    
3. CMS guided for a turnaround of 25%-owned associate OM Materials (Sarawak) in FY21F (which is consistent with our forecast of RM40mil profits), from about RM23mil losses in FY20. This is on the back of an uptrend in global commodity prices (ferrosilicon included) driven by a synchronized recovery in the global economy, underpinned by the availability of effective vaccines. Already, ferrosilicon (FeSi) currently trades at US$1,400/tonne to US$1,500/tonne, well above our estimated breakeven price of US$950/tonne.

OM Materials (Sarawak) will achieve profitability despite only six out of its total of 10 FeSi furnaces being operational. Of the four units that are offline now, two are being converted to produce silicomanganese and there are plans to convert the other two to produce metallic silicon. The reason for the conversion is that silicomanganese and metallic silicon provide more stable margins compared to FeSi. All these four units are expected to come back online in FY22F.

• 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 Mar 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 - 3 Mar 2021