A decent quarter but lacks catalyst

Major re-rating not on the cards. We maintain our HOLD call on Cahya Mata Sarawak (CMS) with SOP-based TP of RM3.90. While most of CMS? key operating segments should improve further in the subsequent quarters from the rollout of Pan Borneo Highway projects, we expect ongoing weakness at 25%-owned OM Sarawak to be a drag on earnings and sentiment on the stock. As such, we do not foresee a major re- rating of CMS?s share price unless there is a turnaround in OM Sarawak from improving ferrosilicon prices.

Positive forex gain? Share of results from associates was RM8m in 3Q16 compared to a share of loss of RM32m in 2Q16. While we are not certain, we think this could be partly driven by positive forex gains from the translation of MYR-denominated payables at OM Sarawak (i.e. the stronger USD makes payment for MYR-based payables cheaper). Operationally, OM Sarawak?s production grew a modest 3% q-o-q, though sales tonnage improved by 14% q-o-q following a slight recovery in the ferrosilicon market in Asian region.

Valuation

Given the weak performance of OM Sarawak, we continue to ascribe no value to this associate for now and apply a 10% holding company discount to our SOP-based valuation. We maintain our HOLD call and SOP-based TP of RM3.90.

Key Risks to Our View

Raw material costs. Fluctuations in raw material costs (i.e. coal, steel) will impact margins for the cement and building material divisions. Forex will also play a role as some of the raw material purchases are transacted in USD (such as coal and imported clinker).

Source: Alliance Research - 01 Dec 2016