KEY INVESTMENT HIGHLIGHTS

• Strong rebound in 3QFY20 with normalised earnings of RM41.6m on prompt resumption of its business operations
• 9MFY20 results came in above our and consensus expectation with a normalised earnings of RM78.9m
• Earnings recovery is expected to further improve in 4QFY20 given the operations remain unaffected by CMCO
• 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 3QFY20 normalised earnings rebounded strongly by +234.2%qoq to RM41.6m albeit still lower on a year-on-year basis (-42.3%yoy). This was mainly driven by the prompt resumption of its core business operations post-MCO. Cumulatively, the group’s 9MFY20 normalised earnings decreased by -48.7%yoy to RM78.9m, primarily dragged by lower contributions from its key core traditional business divisions in 1HFY20. Nonetheless, this came in above our and consensus’ expectations as it accounted for 84.9% and 79.6% of FY20 full year estimates. Moving forward, we expect CMSB’s traditional core business activities to pick up pace in 4QFY20.

Cement and Construction Materials & Trading division. The profit before tax of this two core divisions in 9MFY20 declined by -34.0%yoy and -26.0%yoy to RM42.9m and RM47.2m respectively. Nonetheless, the gross profit margin at both divisions remains at a healthy level of double-digit. This was premised on better cost rationalisation initiatives and lower raw material prices. We opine that these two divisions would post better financial performance in 4QFY20 on the resumption of operations and construction activities moving forward. The improvement could be underpinned by: i) cheaper imported clinker, ii) lower repair & maintenance cost and, iii) lower discharging costs at its the clinker plant, and (iv) robust demand of crushed aggregates for quarry sector.

Order book at Construction & Road maintenance division remains healthy. The profit before tax of this division declined -59.0%yoy to RM21.9m. 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 RM1.11b as of end of June which provides earnings visibility for the next 2 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.

Earnings estimates. We are revising our FY20 earnings forecast to RM117.0m on higher revenue assumption, mainly stemming from its core traditional business segments, while maintaining our FY21 and FY22 earnings forecasts.

Target price. We are maintaining our target price of RM1.70. Note that we are attaching an unchanged forward PER of 11.9x to the group’s FY21 EPS of 14.3sen. The revised PER represents +1 standard deviation to the group’s two year historical average. We are attaching a premium to CMSB due to the group’s resilient business mix and its dominant market share of construction material supply in Sarawak.

Maintain BUY. We posit that the group’s revenue and earnings prospects remain healthy moving forward in anticipation of recovery in 2HFY20 earnings following the resumption of construction and business activities and increased workforce capacity at work sites as seen during the Recovery MCO period. The group’s prospect is also well-supported by its healthy outstanding order book of about RM1.23bin for its construction and road maintenance division which will provide earnings visibility over the next 2-3 years. Meanwhile, we are of the view that CMSB could continue to be a beneficiary from the potential mega infra projects roll-out in the state of Sarawak and Sabah (i.e. Sarawak-Sabah Link Road, Coastal Road, Trans-Borneo Highway project, Sarawak Water Supply Master Plan and Water Grid, Sarawak Petrochemical Hub) in the foreseeable term. In addition, we believe the development expenditure of RM9.6b allocated for the state of Sabah and Sarawak under Budget 2021 and the commitment of the Sarawak’s state government of an additional RM9.8b budget for the state alone with the majority of funds earmarked for developments would bode well with the group’s order book replenishment rate moving forward. All factors considered, we maintain our BUY recommendation on CMSB.

Source: MIDF Research - 26 Nov 2020