INVESTMENT HIGHLIGHTS

• 9MFY18 earnings came within expectations, accounting for 80.9% and 76.0% of ours and consensus yearly estimates.

• Growth in revenue primarily steered by construction/road segment, which staged +53.44yoy growth

• Moving forward, optimism on CMS prospect will be fuelled by Sarawak infrastructure narrative

• Maintain BUY call on the stock with a TP of RM4.13

Broadly in-line. In 3QFY18, CMS grew its revenue by +30.2%yoy to RM465.2m. Likewise, PATAMI followed suit to register RM78.0m which was +23.4%yoy higher in comparison to the same period last year. Accordingly, the group’s quarterly result brought its 9MFY18 PATAMI +39.6%yoy higher at RM208.6 which is within expectations, accounting for 80.9% and 76.0% of ours and consensus yearly estimates.

The biggest improvement in income by construction division… Almost all of the group’s divisions reported higher revenue in 3QFY18, with the biggest jump seen in the construction/road segment. The construction/road segment staged +53.4%yoy growth to arrive at RM142.2m of revenue in the quarter. Cumulatively for 9MFY18, the group posted a total of RM407.4m in revenue, growing by +61.8%yoy from the same period last year. We should highlight that the momentum logged YTD was attributable to better recognition of revenue from the construction works of Pan Borneo Highway, the Miri-Marudi road rehabilitation and the Sarawak Museum projects. Importantly, the revenue translated to RM66.5m (+21.0%yoy) PBT in the 9MFY18 period.

…but weighed down by PBT of cement division. Despite the healthy growth of revenue in 9MFY18, we take note of the slowdown realized in the group’s segmental PBT. The situation was mostly apparent in the cement division, which accounted for 33.7% of the group’s total income YTD. Whilst the revenue increased by +9.0%yoy in 9MFY18, its PBT however dropped -14.0%yoy to RM70.4m. Notably, the decline stemmed from repair costs from the planned maintenance shutdown exercise done at its clinker plant in 1QFY18 and 3QFY18.

Margin compression in Cement and CM divisions. The contraction in margin was a result of expanded cost expenses in key segments, namely Cement and Construction Materials and Trading Division (CM). Besides incurring additional costs from repairs (in Cement division), further margin compression was attributable to increase in bitumen and diesel prices, coupled with lower production volume in CM division. Consequently, we saw margin contracted by - 4.8pptsyoy and -3.5pptsyoy for Cement and CM divisions respectively, in 9MFY18.

Impact to earnings. Since earnings came in within estimates, we do not make any adjustments to our numbers.

Our view. We are encouraged to see that the group is able to grow revenue in most divisions, denoting positive tone on production demand and construction progress. Whilst the margin compression observed pose risk to earnings, we are not ruling out the possibility of margin improving should the business environment turns favourable. Moving forward, we see the future development of Sarawak will provide strong narrative to the long-term sustainability of CMS, which has significant presence in the state. Accordingly, we believe the state’s development plan funded by RM9.1b budget allocations will be able to fuel further optimism on the state’s construction outlook. Some of the major infrastructure projects being planned in Sarawak include the Coastal Road, Second Link Road and State’s Water Grid.

Recommendation. We recommend a BUY call on the stock with a TP of RM4.13, as we ascribe blended PER multiples between the ranges of 10-12x for segments of construction, roadworks and cements.

Source: MIDF Research - 29 Nov 2018