Cahya Mata Sarawak remains 'underweight', says AmInvestment

KUALA LUMPUR: AmInvestment Bank Research remains "underweight" on Cahya Mata Sarawak Bhd (CMS) on expectations that the group's cement division will continue to face headwinds while its associate's performance will drag on earnings.

In an analyst briefing, CMS said its cement division will continue to face margin compression in the near- to medium-term due to the elevated price of imported clinkers, of which it is heavily dependent.

CMS is estimated to source about 60% of its clinker requirements internally, and should reduce that to 45% to 50% by FY22.

The imported clinkers are priced at US$50a tonne at present after easing from about US$58 a tonne in FY19, which is significantly more than about US$38 a tonne previously.

Furthermore, CMS's cement upgrade has been delayed due to the Covid-19 pandemic and will continue to depend on imports from Southeast Asian and Peninsular Malaysia.

Meanwhile. the group's 25%-owned associate OM Materials (Sarawak) is expected to be marginally in the red in 3Q20 due to prolonged weak selling prices of ferrosilicon and manganese alloy.

Only 12 of its 16 furnaces are running as additional furnaces were placed on maintenance in 2Q20 due to limited manpower at the plan.

On the award of additional work packages from key state projects, AmInvestment believes that with the still-elevated national debt, the government has very limited room for fiscal manoeuvre.

"Already, S&P Global Ratings downgraded Malaysia’s outlook to negative from stable on 26 June 2020 to reflect a heightened risk of fiscal deterioation, weighed down by the economic impact of the Covid-19 pandemic, depressed oil prices and fiscal stimulus.

"In Sarawak, while the state could step in to fill the gap with the RM11bil state reserves-fuelled infrastructure projects comprising the Coastal Road, Second Trunk Road and 11 mega bridges (ahead of the state election which must be held by Sep 2021), the rollout of work packages from these highly publicised projects seems to

have hit a snag after the initial hype," it said.

It added also that the altered political landscape in Malaysia after the 14th general election could put a dent in CMS's political prospects of winning new construction jobs and concessions, as well as sustaining high margins for ts businesses.

Reiterating its forecasts, AmInvestment has a fair value of RM1.42 a share on CMS based on 10x FY21 forecast earnings per share in line with its benchmark forward target price-earnings of 10x for mid-cap construction/building material stocks.
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