Investment Highlights

• We maintain our BUY call and forecast for Cahya Mata Sarawak (CMS) with a higher sum-of-parts fair value of RM4.80 (from RM4.45), as we roll forward our valuation base year to FY19 from FY18. We came away from a recent visit to the company feeling that the company is on track to achieve our upbeat forecasts.

• CMS has adopted new corporate structure following the retirement of its former CEO, Dato’ Richard Curtis. The new corporate structure is run by two CEOs, of which in charge in two distinct areas (Exhibit 2) which are 1) CMS Berhad (i.e. corporate affairs) led by Dato Isaac Lugun and 2) CMS Management Services (i.e. existing core businesses) led by Goh Chii Bing. The new leadership will continue to drive the business as outlaid by its predecessor previously.

• The company has guided for healthy topline growth in FY18 for its core businesses like cement and construction and building materials (i.e. aggregates) as Pan Borneo Highway (PBH) has shown sign of stronger progress. In addition, the commissioning of integrated cement plant in Mambong is expected to further boost cement division margins driven by improved efficiency. The company guided for at least 1m MT needed for the construction of PBH spanning more than 1,000km in Sarawak.

• Meanwhile, the recent announcement of the 6-month state road maintenance extension till 30 June 2018 is a transitional measure pending the negotiation and finalisation for the renewal of the concession on a longer term basis. We strongly believe CMS able to secure the renewal of the state road maintenance concession, which is currently pending finalisation from the relevant authorities. Also, the company is eyeing for maintenance work for PBH (under Federal government jurisdiction) in the future. Also the construction division is expected to deliver better earnings on the back of accelerated billings from PBH.

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

• CMS also expects earnings to improve from its strategic investments in FY18. Its 50%-owned SACOFA is expected to grow organically on the back of bandwidth growth, rolling out of LTE sites & increased fiberisation within the state. Meanwhile, the OM Materials is expected to improve its overall performance and generate fair earnings in FY18 from the improved demand and selling prices, as well increased production from the fully-ramped up 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 land banks.

Source: AmInvest Research - 20 Feb 2018