INVESTMENT HIGHLIGHTS

• A briefing session was held by management yesterday

• Clearer prospect largely seen in traditional business for the immediate term

• Production capacity 60% utilized at cement plants

• Coastal Road and Second Trunk Road were highlighted

• Concerns forming on its strategic investments

• Maintain BUY call with an adjusted TP of RM3.85

Management held a briefing session yesterday to provide updates on its latest quarterly results. Below are key the takeaways:

Clearer prospect largely seen in traditional business. The outlook of traditional segments namely cement, construction materials and construction/road maintenance are seen to be anchored by the forthcoming infra projects, namely Coastal Road and Second Trunk Road. Accordingly, earnings are expected to climb higher on the back of better sales volumes of cement and better contribution from the construction segment. The current capacity of 2.75m metric tonnes is not seen as a constrain moving forward given its earlier plant expansion.

Production capacity 60% utilized. According to management, the plant has been running at 60% of total capacity in the beginning of this year. As the largest revenue contributor at 35%, the risk of new entries into the East Malaysia cement market is seen as manageable. The prevailing excess capacity and the group’s competitive supply chain in Sarawak are the factors recognized to fend off new competitors moving forward.

Coastal Road and Second Trunk Road were highlighted. Tender rounds are still on-going, with CMSB working on with other partners to bid on the packages offered. Recently, it was awarded Coastal Road bridge project worth RM466.7m. We expect the awards announcement for the Coastal Road and Second Trunk Road projects to intensify in 2HFY19, following the tender calls made in 1HFY19. Going ahead, management is expecting further improvement in key businesses, to be driven by the ongoing Pan Borneo Highway (PBH) project. We noted that the work on second phase of PBH is likely to commence in CY2020 which carries a value of approximately RM3.5b to RM5b. Cumulatively, the Sarawak’s stretch for PBH could amount to RM21b in value.

Source: MIDF Research - 17 May 2019