Investment Highlights

• We maintain our BUY call, forecasts and SOP-based FV of RM4.45 (Exhibit 1) for Cahya Mata Sarawak (CMS), following an analyst briefing last Thursday where CMS provided positive guidance on the company's outlook in FY18, consistent with our assumptions.

• CMS said that its various ongoing development projects in the state have gathered momentum, while new infrastructure projects tabled under the federal and state 2018 budgets are poised to be rolled out soon.

• Through the rollout of various development projects in the state, CMS expected its cement division performance to perform well in FY18 driven by higher volume demand from Pan Borneo highway across the state as well other infrastructure development projects (i.e. LRT, Baleh Dam) earmarked under federal and state budget.

• Meanwhile, CMS points to construction materials demand that is poised to grow healthily in FY18, underpinned by stronger construction materials (i.e. stone, premix and sand) supply to Pan Borneo highway project. Besides, CMS expects the implementation of state government projects will further help to improve the overall construction materials’ top line.

• Similarly, the company guided its construction division performance to improve in FY18 on the back of accelerated billings from its JV Pan Borneo highway package which shows sign of stronger momentum. Meanwhile its road maintenance division would be affected by the reduced road length maintenance (primarily along Pan Borneo highway stretch) and expects non-renewal of its federal road maintenance (~400km) in the state. However, the company remains optimistic on the renewal of state road maintenance (~6,000km) which has yet to be announced.

• On the other hand, CMS highlighted its property division performance to remain resilient in the coming years underpinned by: 1) development of multiple projects at the Isthmus, 2) undervalued landbank sales, 3) sturdy recurring income from hypermarket (Bandar Samariang) and lodging services in Samalaju Industrial Park.

• CMS expects its ICT division via 50%-owned SACOFA to grow organically on the back of bandwidth growth, rolling out of LTE sites & increased fiberisation within the state.

• On a brighter note, CMS accentuated its 25%-owned OM Materials are expected to narrow down its losses (or it could even break even) in FY17 and to generate net profits in the coming years largely due to the improved demand and selling prices. OM Materials hopes to ramp up to full production (i.e. from 15 to 16 furnaces) by 1QFY18, which translates to better overall associate earnings through the increased production capacity.

• 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 landbanks.

Source: AmInvest Research - 4 Dec 2017