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This article first appeared in The Edge Financial Daily, on May 18, 2016.

 

Cahya-Mata_Table_FD_18May16_theedgemarketsCahya Mata Sarawak Bhd
(May 17, RM3.27)
Upgrade to buy with a lower target price (TP) of RM4.10:
The near-term prospects for Cahya Mata Sarawak Bhd’s (CMS) 25%-owned OM Materials (Sarawak) Sdn Bhd (OMS) is indeed challenging, as only six out of a total 16 furnaces are running. This is despite ferrosilicon prices seem to be stabilising at about US$1,000 (RM4,002) per tonne.

Going forward, the RM26 billion Pan Borneo Highway project is expected to drive earnings for its cement, materials and trading divisions, and this could extend to its construction unit from next year if it secures more roadwork packages.

Furthermore, its 50% stake in Sacofa Sdn Bhd (Sarawak’s sole telecommunications tower service provider), acquired late last year, would see full-year earnings contribution from this year onwards. Meanwhile, business activities at its existing divisions, excluding OMS, are likely to improve following the end of the rainy season in the state.

CMS’ first financial quarter ended March 31, 2016 (1QFY16) profit was well below our and street estimates. We revise down our FY16F (forecast) to FY18F earnings by 3.3% and 41.3% respectively. This is after cutting our forecasts for OMS, and the group’s cement and materials divisions. OMS remains the single largest risk within CMS, with its downside and upside risks dependent on the extent of its operating losses. These remain uncertain at the moment.

We think the possible extension of losses at OMS may dampen investor sentiment on the stock. However, we also believe the knee-jerk selldown in CMS Shares on Monday looks to be overdone. We like the group for being the best proxy to the rapid industrial development of Sarawak. Therefore, we upgrade the stock to “buy” (from neutral), but trim our sum-of-parts-based TP to RM4.10 (from RM4.80). — RHB Research Institute, May 17

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