Investment Highlights

• We cut our FY18 earnings by 8% while maintaining our forecasts for FY19-20F. We reduce our FV by 19% to RM3.91 based on 15x FY19EPS, consistent with its 3- year average historical 1-year forward PE (from RM4.80, based on SOP valuation previously). We maintain our BUY call.

• CMS’ 1QFY17 net profit came in below expectations at only 16% and 14% of our full-year forecast and consensus estimates respectively. We believe the variances against our forecast came largely from the major maintenance cost recognition in 1QFY18 amounting to about RM20mil.

• The company’s 1QFY18 net profit increased 51% YoY underpinned by stronger performance from: 1. Associates – CMS’ 25%-owned OM Materials posted higher earnings YoY (vs. a net loss in 1QFY17) largely due to improved demand and selling prices, coupled with a lower production cost (i.e. electricity). Meanwhile, production volume is expected to increase as the plant is ramping up towards full production (from 15 to 16 furnaces) by middle of 2018. 2. Building materials – Improved YoY earnings mainly from quarries and trading activities but negated by higher operation cost (i.e. increased bitumen & diesel prices) and lower sales volume for premix production. 3. Construction & road maintenance – Acceleration in billings for the Pan-Borneo Highway (PBH) and Miri-Marudi road rehabilitation projects, and the increase in the length of state roads maintained; but partially offset by lower earnings contribution from federal road maintenance (due to the ongoing PBH road construction).

• On the other hand, despite a 7% increase in sales, the cement division’s earnings plunged 55% YoY due to the lumpy maintenance expense incurred. Also, the property division saw a decline in earnings due to lower sales and lodges’ rentals.

Source: AmInvest Research - 16 May 2018