Review

• Excluding extraordinary items amounting to RM2.6mn, CMSB’s 1HFY24 core net profit of RM74.2mn exceeded expectations, representing 60.9% of our full-year estimate and 56.1% of the street’s forecast. This outperformance was mainly driven by a stronger-than-expected margin recovery in the cement division and robust earnings in the oiltools division.

• YoY, 1HFY24 revenue experienced a slight decline of 1.9%, primarily due to reduced contributions from the cement division, which saw subdued sales volume during the prolonged rainy season. Despite this, core net profit surged by 51.7%, largely due to easing input costs, particularly lower imported clinker prices, and enhanced operational efficiency. The oiltools division also contributed to this growth, with strong performances in Nigeria and Indonesia.

• QoQ, 2QFY24 revenue remained relatively flat with a 0.2% increase. However, core net earnings more than doubled to RM41.8mn from RM19.8mn, largely driven by significant improvements in the cement division, where higher gross profit margins were achieved due to lower raw material costs.

Impact

• No change to our FY24-26F earnings forecasts.

Outlook

• The group remains cautiously optimistic about 2024, acknowledging several challenges that could impact performance. Key risks include potential fluctuations in foreign exchange rates and t unresolved arbitration involving Cahya Mata Phosphates Industries Sdn Bhd. While cement demand is expected to pick up in 2HFY24, driven by infrastructure projects, the group remains cautious about the broader economic environment, with persistent inflationary pressures and ongoing supply chain disruptions, exacerbated by global geopolitical uncertainties.

Valuation

• We maintain our Sell recommendation on the stock, with a revised SOP-derived target price of RM1.15, after incorporating a 3% ESG discount based on our 2-star rating. Additionally, we are ceasing coverage on CMSB due to reallocation of our resources and concerns over its corporate governance practices.

Source: TA Research - 28 Aug 2024