• U/G to BUY from Neutral, new MYR1.57 TP from MYR1.12, 21% upside. 2Q24’s result exceeded both our and Street’s full-year estimates. We are sanguine on the medium- to long-term prospects of the cement industry, as Cahya Mata Sarawak stands to benefit directly from the anticipated construction increase given its prominent role as Sarawak’s leading cement provider. We believe our new TP (implying 10x FY25F P/E or 1SD above the historical mean) is justified. This report marks coverage transfer to Cindy Lee.

• 2Q24 core profit of MYR41.2m (>100% YoY, +24.5% QoQ) brought 1H24 core earnings to MYR74.2m (+49.8% YoY), beating our and Street’s full-year estimates at 67% and 56%. 1H24 revenue dropped 1.9% YoY to MYR555.4m, primarily on reduced contributions from the cement division, as the prolonged rainy season slowed construction activities. However, this was slightly offset by stronger contributions from the oiltools segment, driven by robust Nigeria and Indonesia performances. Net margins improved 4.6%, supported by the phosphate division’s lower operating costs and better margins in the oiltools and cement wings. QoQ, core earnings grew by 24.5%, benefiting from lower clinker costs and enhanced operational efficiencies.

• Outlook. Based on our latest channel checks, cement prices have stabilised at MYR380/tonne as of July (+1.1% YoY). We expect medium- to long-term cement demand in Sarawak to be bolstered by major construction projects, eg the Pan Borneo Highway, hydropower dam developments, and Kuching Autonomous Rapid Transit (see Sarawak: Transitioning Into An Economic Powerhouse for details). With this wave of anticipated projects, we believe CMS is well positioned to capitalise on the state's busy construction pipeline.

• Forecasts and valuation. We bump up our FY24F-26F earnings by 32%, 3.6%, and 3.2%, after factoring in better margin assumptions and lower operating losses from the phosphate unit. Our target P/E for the cement wing is raised to 13x from 9x, which represents a slight discount to regional peers’ 18x P/E. This is to account for better prospects for cement players as key beneficiaries of Sarawak’s anticipated infrastructure projects. We roll forward our valuation base to FY25F and our new MYR1.57 TP is now based on a lower 40% holding company discount (from 45%), given the ongoing positive news flows from Sarawak’s construction industry and a potential road maintenance contract for Pan Borneo Sarawak, which is nearing its construction completion stage. These should provide good re-ratings for CMS. A 22% ESG discount is bolted in, given the 1.9 ESG score vs the 3.0 country median. The implied 10x P/E (+1SD of the historical mean) is justified, reflecting CMS’ prominent position in being able to leverage on the construction upcycle in Sarawak and better earnings visibility. Key risks include a plunge in cement prices, delays or cancellations in the implementing of development projects in Sarawak, electricity shortages, and corporate governance shake-ups.

Source: RHB Research - 28 Aug 2024