• Keep BUY, higher SOP-derived MYR1.41 TP from MYR1.02, 35% upside. 9M22 core earnings were above our and Street’s full-year estimates, driven by solid recoveries from the cement and road maintenance divisions. Moving forward, we are optimistic on Cahya Mata Sarawak’s prospects of benefiting from the sustained roll-out of state development projects and easing margins pressure arising from normalised coal costs. Our TP incorporates a 13% ESG discount as CMS’s ESG score is below our country median.

• Results overview. 3Q22 core net profit stood at MYR63.6m (+20% QoQ, +13% YoY), which brought the full-year figure to MYR190m (+26% YoY) – this was above our and Street’s 2022 expectations. The better-than- expected performance was mainly driven by higher sales volumes from CMS’ core cement unit (3Q22 topline: +44% YoY) coupled with improving cost efficiencies and recovery in its road maintenance wing following the movement restriction orders being lifted. During 3Q22, the group recognised a negative goodwill gain of MYR62.5m (eliminated at the core profit line) following its acquisition of Scomi Energy Services’ oilfield operations. No dividend was declared during the quarter under review.

• Cement ASPs. We note that bulk cement ASPs still exhibited an uptrend of 39% YoY growth in 3Q22 thanks to the cost pass-through mechanism implemented by the cement makers. Our latest channel checks suggest bulk cement prices rose further to MYR309/tonne as of October (+5% MoM). Nevertheless, we believe cement ASPs can continue to sustain at current levels as the cement makers have passed on the increased costs to their customers.

• Near-term outlook. CMS is of the view that the temporary shutdown of the Mambong plant (1m tonnes pa capacity) in early November will not jeopardise its 4Q22 sales, as the production resumption after 20 days would be able to fulfil customer demand. Nevertheless, we view the recent correction of Australian thermal coal prices (-28% to USD332/tonne from its USD458/tonne peak) as positive to the cement makers – this should help mitigate margins compression risks in the near term couple. It should also help CMS’ price revisions (+10%) earlier this year, in our view.

• Earnings revision. Post results, we lower our FY22-23 coal cost assumptions to account for normalising coal prices. As such, our FY22F- 23F earnings are raised to MYR229m and MYR234m from MYR84m and MYR191m.

• Valuation. CMS’s valuation remain compelling, as it is trading at a 5.8x 12- month forward P/E, 1.3SD below its 5 year historical mean of 14x. Our TP implies 6.5x 2023F P/E.

Source: RHB Research - 30 Nov 2022