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Reiterate BUY, with new TP MYR1.02 TP from MYR1.40, 25% upside and c.4% FY23F yield. After a better-than-expected 1H22, Cahya Mata Sarawak has embarked on improving cost and operating efficiency to sail through a challenging 2H22 amid rising raw material costs and labour shortage. We expect the ongoing/potential newly awarded infrastructure contracts in East Malaysia and relocation of Indonesia’s capital city to East Kalimantan as key catalysts for the company. This report marks a transfer of coverage to Oong Chun Sung.
Cement demand. In 1H22, monthly average cement production of 1.8m tonnes was higher than the pre-pandemic monthly average of 1.6m tonnes as the sector saw a spike in demand following the full reopening of the economy. However, increasingly challenging operating conditions ie labour shortage and cost pressure since the second quarter has led to a downtrend in cement production. In July, monthly cement production stood at only 1.1m tonnes after peaking at 2.5m tonnes in February.
Cement ASP. Bulk cement prices have moderated 3% MoM to MYR295.50 per tonne, but remained higher than the pre-COVID-19 average ASP of MYR198 per tonne by 49%. Demand recovery has also been impeded by the persistent labour shortage, which may only improve in 2023 as foreign workers slowly return. We think that the revival of local infrastructure projects post-Budget 2023 and political stabilisation (ie post-elections) would be a near-term key sector catalyst moving forward.
ESG aspect. Post review on CMSB’s ESG factors, we maintain our “E” score owing to its renewable power sourcing for its phosphate plant. We downgrade our “S” score as a result of a lack of disclosure in terms of workplace safety relatively to peers. Despite concluding its investigations on allegations of the financial irregularities, we still think the “G” criteria remains weak and should continue to be a key concern among investors. Overall, there has been a lack of further deliberation in terms of ESG disclosure after the company streamlined its sustainability reporting into its annual report as compared to a separate comprehensive report it did in 2020. All in, our ESG score is revised down to 2.3 from 2.4.
Earnings revision and valuation. We raise our FY22 cement price assumption by 10% to MYR370, taking into consideration CMSB’s ASP hike in February. We also raise our 2022-2023 coal cost assumption by 70% and 28% to factor in elevated coal prices following Russia’s invasion on Ukraine and export ban imposed by the Indonesian Government. Our SOP-based TP MYR1.02 incorporates a 13% ESG discount to its intrinsic value.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....