KEY INVESTMENT HIGHLIGHTS

• 1QFY20 earnings missed estimates

• Cement division has shown an improvement

• Construction & road maintenance division booked revenue of RM81.3m in 1QFY20, down by -37.4%yoy

• Earnings forecasts revised lower

• Reiterate BUY with a lower TP of RM1.70

Earnings missed estimates. CMSB’s registered 1QFY20 core earnings of RM282.5m (-32.5%yoy) from RM418.2m in 1QFY19. The results trailed both our and consensus estimates, representing only 8% and 11% of full year forecasts. We attribute the underperformance to lower contribution from all the divisions except for the cement division.

Cement division has shown an improvement. The top line for this division dipped by -18%yoy to RM120.25m. Despite the lower topline figure, its PBT has improved by 69% to RM18.6m as compared to RM11.0m in the previous year. This improvement was largely underpinned by (1) cheaper imported clinker, (2) lower repair & maintenance cost, and (3) higher clinker production volume.

Construction & road maintenance division booked revenue of RM81.3m in 1QFY20, down by -37.4%yoy. Consequently, the division’s PBT shrank to RM6.06m (-60.5%yoy) in the same quarter from RM15.33m in the year before. The factors that steered down the profitability of the construction & road maintenance division were (1) more scope under the new road maintenance contract whilst the value of contract remains unchanged, and (2) lower revenue contributed by construction works due to less work performed this quarter. However, it is worth noting that this division’s order book stood at RM1.23b as of end of March. Going ahead, we leant that construction & road maintenance division will continue to derive stable recurring income from its road concession which currently involves the maintenance of approximately 3,343 km of State roads.

Impact on earnings. Despite our sanguine outlook on the prospects of the construction sector in Sarawak, we are prompted to adjust our earnings forecasts downward after factoring in weaker performance for all divisions except for the cement division in review quarter. Hence, we revise down our earnings forecasts for FY20 and FY21 by -50.1% and - 23.2% respectively.

Introduce FY22 forecast. On top of that, we introduce our earnings forecast for FY22. The table below summarizes our latest core net profit forecasts for Cahya Mata Sarawak.

Reiterate BUY with a lower TP of RM1.70. Going ahead, we anticipate brighter prospects for CMSB as we believe that the Group is a likely beneficiary of the RM11b major infrastructure projects in Sarawak which include (1) Coastal Road, (2) Second Trunk Road, and (3) 11 bridges given its track record as one of the biggest infrastructure players in East Malaysia. However, we remain cautious on the overall outlook for the construction sector on the back of slow progress in construction activities. We adjust our TP to RM1.70 from RM2.21 as we revised down our FY21 earnings. We ascribed blended PER multiple of 10x. The new TP implies expected total return of +12.83%. Hence, maintain BUY call.

Source: MIDF Research - 1 Jul 2020