This article first appeared in The Edge Financial Daily on August 28, 2018

Cahya Mata Sarawak Bhd
(Aug 27, RM3.50)
Maintain buy with a higher target price (TP) of RM4.59: We believe the share price will continue to recover from heavy selldown after a stellar performance in first half ended June 30, 2018 (1HFY18).

Our new TP implies 18 times financial year ending Dec 31, 2018 (FY18) price-over-earnings (P/E), which is at the average of its historical five-year P/E.

We revise our FY18 to FY20 net profit by 1% to 2% to impute higher associates’ income but offset by lower-than-expected contribution from the property division.

The 1H18 net profit of RM130.6 million broadly met, reaching 48% to 50% of our and consensus estimates, as we expect second quarter ended June 30, 2018 (2QFY18) earnings momentum to continue in 2H18.

1H18 revenue grew 11.9% year-on-year (y-o-y), mainly driven by higher contribution from construction and road maintenance, and construction materials and trading and cement divisions.

Meanwhile, 1H18 core net profit grew higher 49.4% y-o-y, mainly contributed by the improved performance of its associate — OM Materials (Sarawak) SB, arising from higher ferrosilicon and manganese alloy production and prices.

As we see it, the good performance will continue in 2H18 due to stable ferrosilicon and manganese prices.

OMS has the capacity to produce approximately 200,000 to 210,000 tonnes of ferrosilicon and 250,000 to 300,000 tonnes of manganese alloy per annum.

All 16 furnaces are in operation, with 10 producing ferrosilicon and six producing manganese alloy.

As at June 30, OMS produced 104,602 tonnes (+25% y-o-y) of ferrosilicon and 124,979 tonnes of manganese alloy (+213% y-o-y).

Aside from the rise in production, OMS’ 1H18 earnings also rose higher from the increase in ferrosilicon and manganese alloy prices. — RHB Research Institute, Aug 27