Analysts maintain call on CMS despite profits below expectations
Analysts with AmInvestment Bank Bhd (AmInvestment Bank) and MIDF Amanah Investment Bank Bhd (MIDF Research) maintain thair investment calls on Cahya Mata Sarawak Bhd (CMS) in spite of the group’s net profit for the first half of its financial year 2019 (1HFY19) coming in below expectations at only 36 per cent of full-year consensus estimates.
KUCHING: Analysts with AmInvestment Bank Bhd (AmInvestment Bank) and MIDF Amanah Investment Bank Bhd (MIDF Research) maintain thair investment calls on Cahya Mata Sarawak Bhd (CMS) in spite of the group’s net profit for the first half of its financial year 2019 (1HFY19) coming in below expectations at only 36 per cent of full-year consensus estimates.
AmInvestment Bank maintained its underweight call for CMS, believing the variances against forecasts came largely from weaker-than- expected performance from the cement and road maintenance divisions, coupled with lower associate earnings.
“The company’s 1HFY19 net profit tumbled 37 per cent year on year (y- o-y) mainly due to lower contributions from the cement division ( higher input cost of clinker), construction and roadmaintenance (cost escalation and expiry of federal road maintenance in 3QFY18) and associates,” it said in its notes.
“This was partially offset by the improved performance from other building materials (due to RM9 million writebacks) and the property division (due to RM10.8 million profits from land sales to Sealink International and a higher number of condominium units and apartments sold).”
There was also a plunge in associate contributions, AmInvestment Bank highlighted, which came largely from its 25 per cent- owned OM Materials Sdn Bhd whereby contributions dropped by 89 per cent y- o-y.
This was due to a 23 per cent y- o-y drop in the average selling price ( ASP) of its key product, ferrosilicon ( FeSi) to US$1,080 per tonne in the 1HFY19 from US$1,320 per tonne in the 1HFY18. It was also dragged by a seven per cent y- o-y drop in sales volume for manganese alloy to 112,000 tonnes in the 1HFY19 from 120,000 tonnes in the 1HFY18.
“The weaker FeSi ASP and sales volume of manganese alloy for OM Materials were largely due to the doublewhammy of rising supply and slowing demand in China amidst the USChina trade war, coupled with stricter environmental policies in China,” the firm ovserved.
AmInvestment Bank nevertheless maintained its view that a sustainable funding model for public infrastructure development in Sarawak is by tapping into federal funds versus draining the state reserve of Sarawak.
“In any case, we believe that the market could have adequately priced in the potential of a state reservesfuelled infrastructure boom in Sarawak (ahead of the Sarawak state election which must be held by Sep 2021) with CMS share price having recovered strongly from its low of RM1.92.
“We remain cautious on CMS due to the cutback in public infrastructure spending as the federal government tightens its belts. We are also mindful of the potential threat to the market dominance of existing players in the construction and building materials sector in Sarawak and 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 concession, as well as sustaining high margin for its construction, road maintenance and cement business.”
Similatly, MIDF Research affirmed that CMS continues to be backed by a robust value chain structure, well positioned as key beneficiary to the state’s growing developments. The plethora of projects awaiting implementation is signs of positive trend in Sarawak which could benefit local contractors such as CMS.
“As a contractor, we think that CMS is on the right track to undertake large- scale projects, given its track record, experience and locality presence. This was exemplified by CMS’ recent win for a Coastal Road bridge project that is worth RM466.7 million.
“In the meantime, we opine further progress of the Pan Borneo Highway will benefit CMS in the form of sustainable earnings accretion in the near term. We maintain our buy call on the stock.”