Following the analyst briefing, we remain cautiously optimistic about CMSB’s outlook, underpinned by the healthy earnings contribution from its traditional core businesses. On top of that, Oiltools has emerged as the second-largest earnings contributor to the group in 1HFY23. Nevertheless, the commercial operations of the phosphate plant are likely to be further delayed, given that the legal dispute with Syarikat SESCO Bhd over the power purchase agreement remains ongoing. Overall, we maintain a Hold call with a lower target price of RM1.14.

The following are the key takeaways from the 2QFY23 analyst briefing:

Latest Updates on the Traditional Businesses

The cement division remains the key revenue generator, accounting for more than 50% of the group's revenue. For 1HFY23, the cement division suffered a slight margin squeeze due to technical issues on the conveyor belts. Moving forward, the group intends to construct a new clinker line with a production capacity of 1.9mn metric tonnes to reduce the reliance on imported clinkers further.

Meanwhile, the road maintenance division is anticipated to further pick up in the upcoming quarters. On the other hand, the construction material and trading divisions are expected to continue benefitting from the ongoing local infrastructure projects such as Sarawak Coastal Road and Baleh Dam. Elsewhere, the property division is still mainly focusing on the delivery of housing at Bandar Samariang, Kuching.

Oiltools Has Become the Second Largest Earnings Contributor in 1H23

Recap, the group acquired Oiltools from Scomi Energy Services Bhd last year. For 1HFY23, Oiltools has already become the second-largest earnings contributor to the group by contributing a PBT of RM16.2mn. The earnings performance of Oiltools is expected to remain strong, underpinned by its healthy outstanding order book of around USD130.0mn. Management guided that Oiltools is actively bidding for more jobs in foreign countries.

The Dispute with Syarikat SESCO Bhd is Still Ongoing

Management guided that the legal dispute with Syarikat SESCO Bhd over the power purchase agreement remains ongoing. Therefore, we believe that the commercial operations of the phostate plant will be delayed further. Meanwhile, management does not discount the possibility that the group might eventually reach an amicable agreement with Syarikat SESCO Bhd.

Forecast

Given the recent emergence of a new cement player in Sarawak, we take this opportunity to slash the volume and margins for the cement division, as we expect to see increasing competition moving forward. Consequently, earnings forecasts for FY23/FY24/FY25 were reduced by 11.1%/9.8%/8.5%, respectively.

Valuation

After revising the earnings forecasts, we tweaked the target price lower from RM1.22 to RM1.14/share based on SOP valuation. Maintain a Hold call on the stock.

Source: TA Research - 12 Sept 2023