INVESTMENT HIGHLIGHTS

• CMSB logged RM41.3m of earnings in 2QFY19

• During the quarter, operating profit has staged a notable decline of -24.7%, to report at RM64.4m

• Revenue from cement was better, but the profit declined by -36.6%yoy to RM20.7m in 2QFY19

• Construction and road maintenance earnings in 2QFY19 slipped by -29.9%yoy to RM18.7m

• We maintain our BUY call on the stock with a TP of RM3.12

RM41.3m earnings logged in 2QFY19. During the period, CMSB has reported RM41.3m of headline PATAMI. Compared to last year, its earnings in the quarter declined by -37.1%yoy from RM91.6m. Cumulatively, the group arrived to 1HFY19 earnings of RM82.1m (-37.1%yoy). Subsequently, it corresponded with 31.5% and 34.7% of ours and consensus’ yearly estimates.

During the quarter, operating profit had a notable decline of - 24.7%, to report at RM64.4m. This was on the back of sluggish performance in cement, construction and property developments segments. The biggest drop was seen in property developments by - 36.9%yoy to record operating profit of RM5.9m. In 1HFY19, the segment still recorded growth (+85.4%yoy), on the back of profit recognition from a land sale, improved sale condominium units and better rental income from unsold apartments. Given the land transaction, we arrived to approximately RM10m (-11.5yoy) of core PBT, after stripping out the net gain quantum of RM10.9m.

Revenue from cement was better but… the profit declined by - 36.6%yoy to RM20.7m in 2QFY19. Despite the increase in revenue of +5.6%yoy in 2QFY19, profit were impacted by the rise in imported clinker cost (raw material) and coal cost (fuel). Accordingly, it arrived to RM31.7m profit YTD, showing a drop of -19.2%yoy. We opine that the earnings contraction will ease moving forward, taking into account the moderation of clinker costs hike and better sales volume in 2HFY19. These factors could be driven by the on-going progress works of Pan Borneo Highway (PBH) that is due completion in mid-FY21.

Construction and road maintenance earnings slipped by -29.9%yoy to RM18.7m in 2QFY19. The earnings drop was in parallel with revenue, which declined by -27.9%yoy to RM110.9m. On cumulative basis, its 1HFY19 earnings fell -24.0%yoy to RM34m which we noted due to contraction in GP margin.

The group 25%- associate OM Materials didn’t contribute much. CMS only saw RM12.4m contribution from all of its associates in 2QFY19, -68.2%yoy lower than the same period last year. We noted that the negative deviation was largely due to lower profit contribution at RM5.31m (-89.0%yoy) from OM Materials in 1HFY19. In particular, demand for its products was impacted by the recent weak commodity prices and the ongoing global trade-war.

Impact on earnings. We think adjustments to our estimates are warranted, as the challenge in its operating environment has turned more pronounced. Accordingly, we adjust our estimates for FY19 and FY20 by -24.1% and -6.0% respectively.

Recommendation. CMSB is backed by a robust value chain structure, well positioned as key beneficiary to the state’s growing developments. The plethora of projects awaiting implementation is signs of positive trend in Sarawak which could benefit local contractors such as CMSB. As a contractor, we think that CMSB is on the right track to undertake large-scale projects, given its track record, experience and locality presence. This was exemplified by CMSB’s recent win for a Coastal Road bridge project that is worth RM466.7m. In the meantime, we opine further progress of PBH will benefit CMS in the form of sustainable earnings accretion in the near term. We maintain our BUY call on the stock with an adjusted TP of RM3.12. The valuation was arrived after ascribing blended PER multiples between the range of 10-11x for construction, roadworks and cement divisions.

Source: MIDF Research - 28 Aug 2019