Following the analyst briefing yesterday, we remain cautious on the outlook for CMS. The earnings are expected to be supported by traditional core businesses. On strategic investments, the near term outlook for OM Materials Sarawak remains challenging while phase 1 of integrated phosphate complex in Samalaju Industrial Park is on track to complete by 4Q2020. We maintain Hold call with a lower target price of RM2.50.

The followings are the key takeaways from the 2QFY19 analyst briefing:

Still driven by Traditional Core Businesses

1HFY19 earnings were mainly contributed by the traditional core businesses, which included cement, construction materials & trading, construction & road maintenance, and property development. The management expects the traditional core businesses to remain as core earnings driver, underpinned by healthy demand from Pan Borneo Highway in Sarawak and potential demand from upcoming state-funded infrastructure projects.

The management believes the cement division will be able to deliver a stronger sales growth this year. Nevertheless, the cement division is suffering from higher clinker price due to reduction of clinker production in China amid high demand from the Bangladesh and Philippines. In addition, the cement division was also dragged by higher coal cost. Based on management guidance, the clinker price has surged at least 20% YoY while the price of coal increased about 17% YoY.

For the construction and road maintenance division, the management is actively tendering for new projects. Current order book stands at RM1.4bn. Besides, the management guided that the state government intends to split the state road maintenance works to a few local players. On the other hand, the management foresees the construction materials & trading division will continue to outperform whereas the property development division to remain flattish.

Near Term Outlook for OM Materials Remains Challenging

The key reason for the lacklustre performance in 1HFY19 was mainly due to lower profit contribution from OM Materials Sarawak. The immediate outlook of OM Materials Sarawak remains challenging due to depressed commodity prices as a result of global trade war. The management guided that the average selling prices for both ferrosilicon and manganese are slightly above the production cost currently. Moving forward, the management believes OM Materials Sarawak may be able to deliver a stronger earnings in 2H19, backed by its existing order book.

Latest Updates on Malaysian Phosphate Additives (MPA) Project

The MPA project is implemented in 2 phases. The total investment for phase 1 is approximately RM1bn, which is funded by a mixture of equity and long term loan. Based on management guidance, the phase 1 of the integrated phosphate complex in Samalaju Industrial Park is expected to complete by 4Q2020.

Impact

Adjustments are made to reflect lower earnings contribution from OM Materials Sarawak and lower revenue contribution from construction & road maintenance division. In addition, we also revise the cost of production higher for cement division. All in, earnings forecasts for FY19/FY20/FY21 were cut by 19.4%/14.8%/10.1% respectively.

Valuation

We trim the target PE for Sacofa from 18x to 14x after taking into account of lingering uncertainties arising from the renewal of concession, which will expire in 2021. All in, we trim the target price from RM3.26 to RM2.50, based on SOP valuation. Maintain Hold call on the stock.

Source: TA Research - 29 Aug 2019