Investment Highlights

• We cut our FY17-19F earnings forecast by 11%, 4% and 1% respectively, reduce our FV by 13% to RM4.45 (from RM5.15) (Exhibit 1) but maintain our BUY call, following an analyst briefing yesterday.

• Cahya Mata Sarawak (CMS) guided for subdued performance in FY17 from cement, building materials, and construction & road maintenance.

• Cement sales volume in FY17 will be not be robust as key infrastructure projects in the state have not quite gained momentum. Nevertheless, this will be compensated by improved margins on reduced clinker & cement production as well as handling costs.

• For building materials comprising largely aggregates, premix and sand, sales will be hurt by the delays in the execution of JKR 2017 Malaysian Road Records Information System (MARRIS) project in some divisions - a federal government's initiative to upgrade and maintain state roads and CMS's role is largely to supply building materials and maintain the roads. On a brighter note, the demand for building materials from various on-going Pan Borneo Sarawak highway project packages should help to partially pick up the slack.

• The performance of the road maintenance division will be affected by the reduced road length (ironically, due to the upgrading of some of the roads to be part of the Pan Borneo Highway). Nonetheless, this will be mitigated by construction profits from the Pan Borneo Sarawak construction package.

• On the other hand, the property division is likely to do well thanks to improved sales from Bandar Samariang and The Isthmus, coupled potential land sales.

• Similarly, its ICT division via 50%-owned SACOFA could be a beneficiary of the state government's initiative to establish a digital economy in the state with a targeted broadband penetration rate of 95%, from ~55% currently.

• Meanwhile, losses from 25%-owned OM Materials are expected to narrow (or it could even break even) in FY17. OM Materials hopes to ramp up its production from 14 to 16 furnaces in the 2HFY17. Also helping, will be the improved demand and selling prices, and low operating cost (i.e. electricity tariff).

• We like CMS for: 1) the strong demand for cement and building materials underpinned by various mega infrastructure projects in Sarawak; 2) its steady growth of construction and road maintenance works including the Pan-Borneo Highway project awarded to CMS (JV with Bina Puri Holdings); and 3) sustained demand from its property development both in Kuching and Samalaju and potential land sale of its current undervalued land banks.

Source: AmInvest Research - 29 Aug 2017