Cahya Mata Sarawak Bhd
(May 16, RM3.23)
Maintain underweight with a lower fair value (FV) of RM2.51: We cut our financial years 2019 to 2021 (FY19 – 21F) core net profit forecasts of Cahya Mata Sarawak Bhd (CMS) by 12%, 4% and 5% respectively (mainly to reflect lower associate contributions). We also reduce our FV by 4% to RM2.51 (from RM2.60 previously) based on 10 times revised  FY20F earnings per share, in line with our benchmark forward target price-earnings for large-cap construction and building materials stocks.

CMS’ first quarter of financial year 2019 (1QFY19) net profit came below expectations at only 14% and 15% of our full-year forecast and full-year consensus estimates respectively. We believe the variances against our forecast came largely from lower-than-expected associate contributions.

The company’s 1QFY19 net profit eased 4% year-on-year (y-o-y) as higher profits from cement (due to higher sales volume and lower maintenance cost), other building materials (due to improved sales and margins, coupled with some write-backs) and property (due to RM10.8 million profits from land sales to Sealink International and a higher number of condominium units and apartments sold), were offset by lower contributions from construction and road maintenance (due to cost escalation) and associates.

Associate contributions, that come largely from 25%-owned OM Materials, plunged 63% y-o-y due to: i) a 14% and 23% y-o-y drop in sales volume for ferrosilicon (FeSi) and manganese alloy to 51.2 thousand tonnes and 50.6 thousand tonnes respectively; and ii) a 15% y-o-y drop in the average selling price (ASP) for FeSi to US$1,170 (RM4,847.90) a tonne in the 1QFY19 from US$1,380 a tonne in the 1QFY18.

The weaker FeSi sales volume and ASP for OM Materials were largely due to supply pressure from China on the back of a 21% increase in FeSi production in China to 5.38 million tonnnes for the 12 months ended January 2019 (from 4.43 million tonnes for the 12 months ended January 2018) coupled with lower demand for the 75%-grade FeSi on the back of stricter environmental policies in China.

We maintain our view of that a sustainable funding model for public infrastructure development in Sarawak is by tapping into federal funds versus draining the state reserves of Sarawak. In any case, we believe that the market could have adequately priced in the potential of a state reserves-fuelled infrastructure boom in Sarawak (ahead of the Sarawak state election which must be held by September 2021) with CMS share price having recovered strongly from the year-low of RM1.92.

We remain cautious about CMS due to the cutback in public infrastructure spending as the federal government tightens its belt. We are also mindful of the potential threat to the market dominance of existing players in the construction and building materials sectors in Sarawak on an altered political landscape in Malaysia after the 14th general election.

Increased competition could put a dent on CMS’ prospects of winning new construction jobs, securing extensions or its road maintenance concessions, as well as sustaining high margins for its construction, road maintenance and cement businesses. — AmInvestment Bank, May 16