INVESTMENT HIGHLIGHTS

• Results met expectation…

• …but recovery is too early to tell

• Hence, adjustment is necessary to avoid undue optimism

• Overall, maintain BUY with an adjusted TP of RM4.13

6MFY18 earnings met our expectations. CMSB’s 6MFY18 PATAMI met ours and went above consensus’ expectations at RM130.6m (+57%YoY) compared to the preceding period. It earnings matched 46.0% of ours and 49.0% consensus’ of full year forecast respectively. Results were in-line with our estimation of an increased contribution from OM Materials due to full operating capacity of 16 furnaces from improved demand of iron ore and alloy prices as a result of industrial growth in India, Japan and China. Notably, the demand from China was influenced by government policies to reduce pollution hence requiring higher grade iron ore and new supply of ferrosilicon due to factory closures.

But key segments recovery is still too early to tell. Apart from that, the construction material and roadworks segments showed recovery by registering; a) RM200.5m (+10.5%YoY) and b) RM265.2m (+66.7%YoY) respectively. We would like to see earnings improvements extending to 4Q18 to assure that progress billings from Pan Borneo does not stumble.

Adjustment is needed to reduce any hard landings. Despite the positive newsflow, we believe it is necessary to adjust the valuation for CMSB to incorporate current government policies of reducing infrastructure expenditure and bracing for commodity-related cyclicality. We change our valuation methodology to mitigate any blips in earnings for FYE19/FYE20. The certainty of our DCF assumptions will be negatively impacted if hiccups in Pan Borneo Highway’s progress billings occur. Hence, we apply price-to-earnings ratio instead. Secondly, we are tapering the revenue forecasts for; i) FYE19 from RM1.9bn to RM1.7bn (-10.0%) and ii) FYE20 from RM1.95bn to RM1.75bn (-10.0%). As a result, our earnings assumptions shifts by <10.0%; i) FYE19 from RM281.3m to RM257.7m and FYE20 from RM290.0m to RM261.0m. The modest trim in our forecast is to moderate any undue optimism from segments which is non-core to CMSB’s business and as a reminder of its price-to-book multiple which has soared to 1.56x.

Recommendation. Consequently, we maintain our BUY recommendation with an adjusted SOP-based TP of RM4.13 per share. We assigned lower PER ratios between the ranges of 10-12 for segments of construction, roadworks and cements which makes 76.2% of its equity value to illustrate our defensive stance.

Source: MIDF Research - 27 Aug 2018