CMS is playing catch-up after a poor start in 1H. 3Q15 profit rose 61% QoQ and 9M15 results were largely within our expectations. Maintain BUY and MYR5.55 TP (7% upside). The impending Sarawak state election may put the company in the limelight. CMS is also set to benefit directly and indirectly from Sarawak Corridor of Renewable Energy (SCORE)-related initiatives.

Gaining stream in 3Q15. After a poor start in 1H15, Cahya Mata Sarawak’s (CMS) 3Q15 net profit rose 61% QoQ to MYR65.5m. We deem the results largely in line with our forecast but marginally short of consensus, with 9M15 profit reaching 74%/70% of the respective projections. Headline numbers appeared to be lower YoY, mainly due to a one-off exceptional gain in 9M14. We also note that there were no land sales to date vis-à-vis the c.MYR24m profit from land disposals in 1H14.

Near-term catalysts. Earnings from its road maintenance and materials and trading divisions rose ahead of the impending Sarawak state election (by Jun 2016). We believe both divisions may eventually benefit from the MYR26bn Pan Borneo Highway project. Meanwhile, the weaker MYR resulted in flattish earnings for its cement unit in 9M15. However, we expect the commissioning of its new grinding plant in Mambong, Sarawak, early next year may help to improve profitability of its cement unit in 2016. Also, its acquisition of a 50% stake in Sacofa SB in Oct 2015 may see full-year earnings contribution from FY16 onwards, pending more details from management. Separately, more contribution is expected from its property division upon completion of certain developments plus possible gains from land sales. Overall, we still expect core profit to rise 26.7%/16.4% YoY in FY16/FY17 respectively.

Key risk. Ferro silicon prices have plummeted in tandem with the broad weakness across the commodity complex, hence dampening earnings of its 25%-owned OM Materials (Sarawak) SB (OMS). That said, we expect the unit to remain in the black, thanks to competitive energy costs and a weaker MYR. Also, there is room to further reduce its production cost upon its plant’s full commissioning in 2016.

Maintain BUY with a MYR5.55 TP. The lack of Sarawak-based listed companies at a time of an imminent state election may put CMS under the spotlight, thereby justifying its premium valuations. Keep BUY and SOP-based TP of MYR5.55, implying 2.8x P/BV and 21x FY16F P/E.

Financial Exhibits

OMS (in which CMS has a 25% stake) and its new grinding plant are set to be key earnings contributors from FY16

Its strong cash-generating capacity provides room to reward shareholders via a 40% payout commitment

CMS’ solid balance sheet enables it to take on any attractive investment opportunities, particularly in SCORE

We project decent earnings growth over the short to medium term, which should continue to bolster the group’s key financial ratios

SWOT Analysis

CMS’ rationalisation during the past few years has put it on the right footing to capitalise on the opportunities arising from the Sarawak Corridor of Renewable Energy (SCORE)

Company Profile

Cahya Mata Sarawak (CMS), a conglomerate with most of its operations based in Sarawak, has its main business in cement manufacturing. The group is also involved in building materials, construction, road maintenance and property development.

Recommendation Chart

Source: RHB Research - 26 Nov 2015