CMS units still major beneficiaries of Pan Borneo Highway Sarawak job

Cahya Mata Sarawak Bhd (March 8, RM4.21)

Maintain buy with a higher target price (TP) of RM4.70: Cahya Mata Sarawak Bhd’s (CMS) cement and construction materials divisions remain major beneficiaries of the Pan Borneo Sarawak Highway and would support earnings into 2017 with physical works expected to accelerate in the second half of 2017.

Contribution from its RM1.36 billion Pan Borneo Sarawak construction secured with Bina Puri (70:30 joint venture) would help to offset the lower earnings from its 680km Federal Road concession ending in 2017. We gather that discussions on the extension of this concession are already underway.

Based on 25%-owned OM Holdings Ltd’s financial year ended Dec 31, 2016 (FY16) results announcement, OM Material (Sarawak) Sdn Bhd’s (OMS) ferrosilicon production continues to ramp up, achieving 126,000 tonnes per annum (+169% year-on-year) as its furnaces increase in utilisation.

Additionally, the first of OMS’ six modified furnaces for manganese alloy production was fired up in mid-December 2016. CMS expects the remaining five to be commissioned by the third quarter of 2017 (3Q17).

With the introduction of manganese alloy production in our forecasts, our financial year 2018 (FY18) earnings are tweaked upwards by 3%, assuming OMS will break even in FY18. There is no change to FY17 forecasts.

Taking into account Lafarge Malaysia Bhd’s normalised mean price-earnings ratio (PER) of 26 times, we peg CMS’ cement and construction materials to a higher 23 times PER (12% discount to Lafarge for its smaller size) from 20 to 22 times.

After rolling forward our valuation base year to 2018, we derive a higher sum-of-parts-based TP of RM4.70 (+12%). There is potential upside to our earnings forecasts should OMS reach break-even production faster than expected. — Maybank IB Research, March 8

This article first appeared in The Edge Financial Daily, on March 9, 2017.

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