Stronger 2H seen for Cahya Mata Sarawak

Cahya Mata Sarawak Bhd (May 16, RM3.50)

Maintain buy with a lower target price (TP) of RM4.57: We believe the post-election knee jerk sell-off on the share price is only temporary, as we believe Cahya Mata Sarawak Bhd’s (CMS) traditional businesses are backed by its expertise and heavy investments in these units. Our TP cut factors in the risk of a potential delay in the Pan Borneo Highway Sarawak (PBHS) project. First quarter of financial year 2018 (1QFY18) earnings were broadly in line with expectations, growing 50.7% year-on-year mainly on higher contributions from OM Materials Sarawak (OMS).

CMS 1QFY18 core net profit of RM39 million were broadly in line with our and consensus expectations, reaching 14% to 15% of forecasts. Do note that 1Q earnings are normally lower due to the wet and festive seasons in Sarawak. Revenue grew 15.3%, mainly driven by higher contributions from CMS’ construction and road maintenance, construction materials and trading, and cement divisions. Net profit grew 50.7%, mainly from associate OMS’ improved performance, but was offset by lower earnings from the group’s cement wing due to higher repair costs.

We maintain our forecast FY18F to FY20F earnings, as we expect stronger second half (2HFY18) net profits ahead. This is due to a recovery in cement demand, especially from PBHS’ further progress. However, we lower down our sum-of-parts-based TP to RM4.57 from RM4.96, 34% upside, as we impute a lower 16 times price-earnings (PE) multiplier for the cement division from 20 times previously. This is to factor in the risk of a potential delay in the aforementioned highway project. Overall our new TP implies 18 times FY18F PE, which is at the average of its historical five-year PE.

We continue to like CMS and maintain our “buy” recommendation. We believe the group’s traditional businesses — for example, cement market monopoly in Sarawak and road maintenance — are backed by its expertise and heavy investments in these units. Having said that, a potential delay or cancellation of the PBHS is likely to be the key risk to CMS. — RHB Research Institute, May 16

This article first appeared in The Edge Financial Daily, on May 17, 2018.

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