Cahya Mata Sarawak Bhd
(Feb 12, RM3.01)
Downgrade to underweight with a lower fair value (FV) of RM2.48: We downgrade our call for Cahya Mata Sarawak Bhd to “underweight” from “buy”. We raise our financial year 2018 net profit forecast by 20% to largely reflect a better performance from OM Materials but cut financial year 2019 (FY19)-FY20 earnings forecasts by 5% and 14% respectively on the weakened prospects for the construction and building material sectors in East Malaysia. We reduce our FV by 37% to RM2.48 (from RM3.91) based on 10 times revised FY19 earnings per share forecast, in line with our benchmark forward target price-earnings ratio for large-cap construction/building material stocks.

 
Having recovered by a whopping 59% to RM3.05 from a post-14th general election (GE14) low of RM1.92 on May 21, 2018, we believe the stock’s risk premium could now have overshot to the downside (versus overshooting to the upside previously).

At present, Cahya Mata Sarawak’s outstanding construction order book stands at RM1.3 billion (coming entirely from the Pan-Borneo Highway). It has two road maintenance concessions covering 241km of federal roads and 5,847km of state roads in Sarawak. It is the sole cement producer in Sarawak with an estimated cement consumption of 1.6 million tonnes in 2018.

On a brighter note, the performance of Cahya Mata Sarawak’s associates surpassed our expectations, with RM99.2 million contributions to its bottom line for the first nine months of FY18 (versus our full-year forecast of RM72 million). The earnings surprise came largely from the strong showing by OM Materials, thanks to higher production and product selling prices. We raise our FY18-FY20 associate contribution forecasts by 30%-40%, assuming sustained output and prices for ferrosilicon and manganese alloy.

We turn cautious on Cahya Mata Sarawak due to the cutback in public infrastructure spending nationwide, including East Malaysia. We are also mindful of the change in competitive landscape for the construction and building material sectors in East Malaysia, following the change in political scene post-GE14 in 2018, coupled with the Sarawak state election by September 2021. Increased competition will put a dent on Cahya Mata Sarawak’s prospects of winning new construction jobs, securing extensions for its road maintenance concessions, as well as sustaining high margins for its construction, road maintenance and cement businesses. — AmInvestment Bank, Feb 12