KEY INVESTMENT HIGHLIGHTS

• The group, through its 51% subsidiary PPES Works (Sarawak) was awarded an LOA for management and maintenance of State roads in Sarawak

• The scope of works is to undertake planning, organizing, directing and controlling of the management and maintenance of contract state roads

• The LOA signed is an extension to CMSB’s existing road contract

• Maintain BUY call at TP of RM2.94

The group, through its 51% subsidiary PPES Works (Sarawak) was awarded Letter of Acceptance from the Government of Sarawak for performance-based contract for the long-term management and maintenance of State roads in Sarawak for Package 1. The contract which covers maintenance work for Kuching, Serian, Samarahan, Kapit, Sibu and Sarikei divisions, is effective for a period of ten years starting on 1st January 2020 to 31 December 2029. The remaining 49% equity interest in PPESW is owned by Sarawak Economic Development Corporation (“SEDC”).

The scope of works is to undertake planning, organizing, directing and controlling of the management and maintenance of contract state roads. This includes preparation of annual work program and budget, to carry out annual road condition survey, performing the routine and periodic maintenance. At a total contract road length of 3,300.6km, the contract sum is estimated at RM99.2m/year excluding any additional works.

The LOA signed is an extension to CMSB’s existing road contract. This was after six-month contract extension granted by the state government, from a period of 1 July to 31 December 2019 which served as short-term measure pending the negotiation and finalization for longer term concession renewal. Based on the new LOA signed, we noted that the CMSB’s total state road contract was reduced from 6,200km to 3,300km. Despite the sharp reduction, we are comforted on this latest win would cast a brighter light on earnings visibility for the road maintenance business. Notably, the reduction in length was not entirely a surprise due to the belief that the remaining contracts will be broken down into smaller parts with state road players are expected to come in.

Recommendation. We maintain our BUY call on the stock with a TP of RM2.94. This was after ascribing blended PER multiples between the range of 8-12x for construction, roadworks and other associated divisions. CMSB is backed by a robust value chain structure, well poised as key construction player in Sarawak. The plethora of projects set in the near term is signs of positive trend in Sarawak construction sector, to benefit local proxy such as CMSB. We believe that the group`s future growth will be driven by the ongoing Pan Borneo Highway project and the State government’s increased spending on infrastructure. In addition, RM6.60 billion is allocated for development and a further RM21.67 billion of State’s fund has been set aside for the implementation of major infrastructure projects including the Coastal and Second Trunk Road based on the State’s budget for 2020.

Source: MIDF Research - 9 Dec 2019