• Keep BUY, higher SOP-derived MYR1.60 TP from MYR1.41, 20% upside, c.3% yield. FY22 core earnings missed our and Streets’ expectations, after stripping out one-off items. Despite the disappointing bottomline, we keep our BUY call on Cahya Mata Sarawak as we remain upbeat on Government initiatives to improve public infrastructure in East Malaysia. Our TP includes a 13% ESG discount, as CMS’s ESG score is below the country median.

• FY22 results overview. CMS recorded a 4Q22 core net loss of MYR68.7m (-208% QoQ, -219% YoY) – after stripping out one-off items and gains on disposal of investment associates – bringing the full-year figure to MYR121.5m (-41.6% YoY), significantly below our and Street full-year expectations. Still, full-year revenue grew 24% YoY, mainly on higher contributions from the cement and road maintenance segments as well as new contribution from Cahya Mata Oiltools. We seek more clarity from the analyst briefing scheduled on 6 Mar.

• Cement ASP. We note that bulk cement ASP is still exhibiting an uptrend, with 31% YoY growth in 4Q22, thanks to the cost pass-through mechanism implemented by cement makers. Our latest channel checks suggest bulk cement prices rose further to MYR390/tonne in Jan 2023 (+11.1% MoM).

• Outlook. CMS is the prime beneficiary of Budget 2023’s higher allocation for East Malaysia (2023: MYR12.1bn, 2022: MYR9.8bn). In addition, we expect demand for cement in Sarawak to provide earnings visibility, underpinned by ongoing state construction projects such as the Baleh Dam (expected completion by 2026), Sarawak coastal road, second trunk road, and Pan Borneo highway. The recent correction in Newcastle coal and Rotterdam coal prices (YTD: -46% and -40%), driven by the warmer-than- expected winter season, led to weaker-than-expected coal demand in Europe and China for fuels used to heat homes. The price correction is positive for cement makers, as it should help mitigate margin compression risks in the near term.

• Earnings revision. Post results, we lowered our FY23/24 coal cost assumptions by 5% to account for normalising coal prices. Our FY23 earnings estimates were raised to MYR248m after factoring in the potential demand from the higher allocations in Budget 2023.

• Valuation. CMS’s valuation remains compelling, trading at 5.8x 12-month forward P/E, 1.3SD below its 5-year historical mean of 14x. Our TP implies 6.9x 2023F P/E, after incorporating a 13% ESG discount (as CMS’ ESG score is below our country median of 3.0).

Source: RHB Research - 28 Feb 2023