Review

• Stripping off an unrealized forex gain and other one-off items totaling RM18.4mn, CMSB’s 1QFY24 core earnings of RM19.8mn fell short of both ours and consensus’ expectation, representing only 14.9% and 12.8% of ours and the street’s full-year estimates, respectively. The negative variance was primarily due to lower sales volume in the cement division, which was impacted by persistent rainy weather that slowed construction activities.

• YoY, 1QFY24 revenue exhibited minimal growth, with a marginal increase of 0.6% to RM277.4mn. However, core earnings declined by 45.6%, primarily due to a lower contribution from the cement division resulting from decreased sales orders in the construction industry. This decline was partially offset by the improved performance of the phosphate plant, with its loss before tax (LBT) narrowing by 25.2% to RM19.2mn.

• As for the property development division, the PBT surged significantly to RM6.2mn from RM0.9mn a year ago, mainly due to gross margin recognition on a deemed land sale transaction. Meanwhile, the road maintenance division’s PBT experienced a turnaround from LBT of RM0.1mn to PBT of RM5.3mn, driven by higher revenue recognition and an improving GP margin.

• QoQ, 1QFY24 core earnings plummeted by 74.2%, alongside a topline contraction of 16.6%. This decline was primarily due to reduced contribution from the cement division and a higher effective tax rate of 31.0%.

Impact

• Following the lower-than-expected earnings performance, we lower our production output assumption for the cement division to reflect the slowing demand for cement products. As a result, our FY24F earnings forecast is revised downward by 8.6%. We forecast FY26 net profit to grow by 3.8% YoY to RM152.1mn, supported by a resilient demand in the cement division due to the robust construction outlook in Sarawak.

Outlook

• Despite the company's cautious stance on the challenges posed by the weakening MYR against the USD and the unfavourable outcome of ongoing arbitration for Cahya Mata Phosphate, we believe that demand for building materials in Sarawak should remain strong. This is particularly true for cement, which is supported by local infrastructure projects such as the Kuching Urban Transportation System, the Sarawak-Sabah Link Road, and the Baleh Dam.

Valuation

• After rolling forward the valuation base year to CY25 earnings, we have arrived at a new target price of RM1.19 (from RM1.11). However, given the recent strong run-up in the share price, we believe the stock is now fairly valued. Therefore, we recommend that investors take profits at this juncture. Downgrade to Sell.

Source: TA Research - 24 May 2024