• BUY, new MYR1.48 TP from MYR1.60, 30% upside, c.4% yield. 1Q23 core net profit missed our expectations but was in line with Streets’, dragged by the loss-making road maintenance and phosphates divisions. Nevertheless, Cahya Mata Sarawak’s valuation remains compelling at 5.4x FY23 P/E, and its earnings visibility should continue to be supported by robust sales volumes, underpinned by ongoing state construction projects.

• Results missed expectations. While 1Q23 revenue of MYR275.7m saw 28.8% YoY growth, CMS’ core net profit came in at MYR48.7m (-34% YoY) – below our estimates but in line with consensus’ at 20% and 25%. Topline growth was driven by higher contribution from the cement and oil tools divisions. The cement division saw higher revenue of MYR159.3m (-3% QoQ, +16.6% YoY) and PBT of MYR37.55m (+28.8% YoY; 4Q22: LBT of MYR3.3m), mainly driven by better sales volumes. The property division reported lower PBT of MYR0.94m, down 86% YoY from 1Q22’s MYR6.7m. CMS’ overall operating profit was down 32.1% YoY to MYR28.2m, dragged by the loss-making road maintenance and phosphates divisions.

• Cement outlook. Average bulk cement ASPs softened 5% MoM to MYR371/tonne in April. Data from the Department of Statistics Malaysia showed that cement production was at 2.7m tonnes in March, up marginally from February’s 2.5m tonnes, and above the 1.3m tonne pre-pandemic monthly average. While we think the elevated cement ASPs are unlikely to sustain in the longer term, cement makers’ earnings visibility should be supported by robust sales volumes, 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.

• Earnings revision. Post results, we cut FY23-24 cement ASP assumptions by 2% and 4% to account for normalising cement prices (Figure 2). As such, our FY23 earnings estimates are lowered to MYR225m. Our new SOP- derived TP is MYR1.48, implying 7.0x FY23 P/E, after incorporating a 10% ESG discount (as CMS’ ESG score is below the country median). CMS’ valuation remains compelling at 5.44x 12-month forward P/E, at 1SD below its 15x historical mean. Key risks: A plunge in cement prices, delays or cancellations in Sarawak’s development projects, an electricity shortage, and corporate governance shake-ups.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 23 May 2023