This article first appeared in The Edge Financial Daily on April 5, 2019

Cahya Mata Sarawak Bhd
(April 4, RM3.49)
Maintain underweight with a fair value (FV) of RM2.60: We raise our FY19-20F (forecast) core net profit by 7%-10%, increase our FV by 5% to RM2.60 (from RM2.48) but maintain our “underweight” call for Cahya Mata Sarawak (CMS). Our new FV is based on 10 times revised FY20F earnings per share, in line with our benchmark forward target price-to-earnings (P/E) for large-cap construction/building material stocks.

The earnings upgrade is to reflect:

(1) an assumption for new construction job wins of RM500 million in FY19F, and

(2) slightly better sales volumes and margins for its cement and building material divisions.

We maintain our view that a sustainable funding model for public infrastructure development in Sarawak is by tapping federal funds versus draining the state reserves of Sarawak.

In any case, we believe the market could have adequately priced in the potential of a state reserves-fuelled infrastructure boom in Sarawak (ahead of the Sarawak state election by September 2021) with CMS share price having recovered by a whopping 77% from the year-low of  RM1.92. We believe the tell-tale sign is the muted share price reaction to CMS announcement on 13 March 2019 of it winning the RM466.7 million Bintulu-Jepak bridge project via a joint venture (JV) between its 51%-owned unit PPES Works and China Communications Construction Company (CCCC) . The award of this contract was supposed to herald the state reserves-fuelled infrastructure boom in Sarawak.

Meanwhile, we believe CMS, being a work package contractor (WPC) for the RM1.36 billion Sg Awik-Bintangor junction stretch of the Pan Borneo Highway (via 70:30 JV with Bina Puri), will not be affected by the potential change to the project’s execution based on the project delivery partner (PDP) model.

This is because:

(1) there have not been talks on potential reduction of scope for the project (unlike the mass rapid transit 2 (MRT2) and light rail transit 3 (LRT3), and

(2) CMS, together with other WPCs for the project, have secured their work packages on highly competitive bids, leaving themselves little room for excessive profits. At present, CMS’ package is 30% completed.

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 material sectors in Sarawak on an altered political landscape in Malaysia post 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, April 4