KEY INVESTMENT HIGHLIGHTS

• Remained profitable in 2QFY20 with normalised earnings of RM12.5m despite movement control order (MCO) lockdown

• 1HFY20 results dipped to RM36.8m (-53.5%yoy) is widely anticipated and within our and consensus expectation

• Earnings recovery is expected in 2HFY20 given the resumption of operations post-MCO to catch up with orders

• Construction and road works order book remains healthy

• Poised to benefit from Sarawak’s mega infra projects

• Maintain BUY with an unchanged target price at RM1.70

Earnings remain resilient. Cahya Mata Sarawak Berhad (CMSB)’s 2QFY20 normalised earnings amounted to RM12.5m (-68.2%yoy). This was mainly due to MCO lockdown which disrupted the operations of their traditional core businesses. Cumulatively, the group’s 1HFY20 normalised earnings decreased by -53.5%yoy to RM36.8m, primarily dragged by lower contributions from its key core traditional business divisions in 2QFY20. Fortunately, this was partially mitigated by its increased share of profits from its strategic investments (i.e. Kenanga Investment Bank, KKB Engineering and SACOFA) to RM30.6m (+25.3%yoy). Moving forward, we expect CMSB’s traditional core business activities to pick up pace in 2HFY20.

Recovery in Cement division to be gradual in 2HFY20. The revenue for this division in 1HFY20 dipped by -37%yoy to RM151.8m. This led to lower PBT by -76%yoy to RM9.7m, predominantly due to the MCO which adversely impacting the quarry, premix, and trading sectors. Nonetheless, we opine that the division would post better financial performance in 2HFY20 on the resumption of operations and construction activities moving forward. This improvement could be underpinned by: i) cheaper imported clinker, ii) lower repair & maintenance cost and, iii) lower discharging costs at its the clinker plant. Note that the Mambong clinker plant was closed for two weeks post-MCO until mid-July due to COVID-19 outbreak which has resumed.

Order book at Construction & Road maintenance division remains healthy. The profit before tax of this division declined -67%yoy to RM11.3m. The factors that steered down the profitability of the construction & road maintenance division were: i) more scope under the new road maintenance contract whilst the value of contract remains unchanged and, ii) 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 June which provides earnings visibility for the next 2-3 years. Moving ahead, we posit that the construction & road maintenance division will continue to derive stable recurring income from its road concession which is currently involving the maintenance of approximately 3,343 km of State roads

Source: MIDF Research - 27 Aug 2020