INVESTMENT HIGHLIGHTS

• To recap, CMSB reported RM41.3m of headline PATAMI in 2QFY19

• OM Materials only recorded RM5.31m (-89.0%yoy) profit in 1HFY19

• Management remains optimistic with the roll outs of highvalue road projects namely Coastal Road and Second Trunk Road

• Construction Materials and Trading. The division improved its PBT by +32.0%yoy (excluding provision reversal of RM9m) to RM31m in 1HFY19

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

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 which could benefit local contractors such as CMSB. On that account, the group is already in the sweet spot to undertake large-scale projects, given its track record, experience and locality presence. Despite the sluggish earnings seen in 1HFY19, we remain optimistic on its outlook in the long-term. Hence, 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.

To recap, CMSB reported RM41.3m of headline PATAMI in 2QFY19. 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), accounting 31.5% and 34.7% of ours and consensus’ yearly estimates. Yesterday, the management held a briefing with analyst to provide further explanation on the results as well as its outlook on the business. Few things we wish to highlight include:

OM Materials. Its profit contribution was only recorded at RM5.31m (- 89.0%yoy) in 1HFY19. This was a result of recent weak commodity prices and the ongoing global trade-war which has been impacting the entire industry. The group expect improvement will pick up pace in beginning in 2HFY19, on the back of improving prices. However, we believe that price recovery would take place gradually. On that account, we will not be surprised if earnings continue to be interrupted in the near term.

Construction Materials and Trading. The division improved its PBT by +32.0%yoy (excluding provision reversal of RM9m) to RM31m in 1HFY19. This was mainly due to the +27% increase in revenue and +1%yoy uptick in gross profit margin. Moving forward, it will commission second line of 1.3MTpa at Sibanyis quarry. The void left by closure of Penkuari will be filled by 1MTpa from newly acquired Borneo Granite. The increased capacity will enable CMS to cater for the slew of infrastructure projects in Sarawak in the run-up to the State election.

Construction and Road Maintenance. Management remains optimistic with the roll outs of high-value road projects namely Coastal Road and Second Trunk Road. They are hopeful to clinch several packages, which would expand the visibility of construction revenue. We noted that current orderbook stands at RM1.42b. On road maintenance, it is confident of retaining at least 50% of the current 6,260km state road contracts. In order to expand contribution, it is also eyeing for rural road contracts which offers 9,000km long of maintenance works.

Source: MIDF Research - 29 Aug 2019