Exposure to development spending boon for CMS


RHB Research said its latest report: “We came away from CMS’ nine-month FY2020 results briefing feeling reassured of its 2021 prospects, supported by a promising pipeline of Sarawak infrastructure works heading into the next year.”

PETALING JAYA: RHB Research is positive on the prospects of Cahya Mata Sarawak Bhd (CMS) going into 2021.

This is given the company’s strong exposure to Sarawak’s robust development spending, which is supported by its strategic investments’ expanding earnings base.

RHB Research said its latest report: “We came away from CMS’ nine-month FY2020 results briefing feeling reassured of its 2021 prospects, supported by a promising pipeline of Sarawak infrastructure works heading into the next year.”

The research unit is also maintaining a “buy” call on CMS with a higher target price at RM2.40 from RM2.23, up by 25% with about 4% in FY2021 yield.

Despite recent share price recover, RHB Research said CMS valuations remained attractive. It noted that the group’s cement operations would see better margins.

“CMS expects cement demand in Sarawak to remain healthy in 2021 at 1.6 million tonnes, while benefiting off more favourable imported clinker prices currently.”

Its reliance on clinker imports is also set to lower progressively, as the group aims to gradually increase production by its own clinker plant to 700,000 tonnes in 2021, and subsequently hit full capacity at 800,000 tonnes by 2022, added RHB Research.

While the fourth quarter FY2020 would be slightly affected by upgrading works on the clinker plant, this should nonetheless serve to lift the segment’s margins going forward.

As for construction materials and construction segments, the research unit said CMS expected the former to sustain its strong momentum, in tandem with the ramp-up of infrastructure project roll-outs.

While the latter has been afflicted by reduced road maintenance jobs and a depleting construction orderbook over the nine months FY2020.

“But CMS management believes this is set to reverse – with the group now collaborating more closely with its strategic partner, Sarawak Economic Development Corp, to participate in subsequent job tenders, ” RHB Research pointed out.

Stronger joint-ventures and associate companies’ contributions are in store.

CMS’ associates, KKB Engineering Bhd and Sacofa Sdn Bhd are expected to capitalise on additional project rollouts for water and telco infrastructure in Sarawak.

Meanwhile, the earnings contributions by Kenanga Investment Bank Bhd are set to maintain strong year-on-year traction, on the back of the elevated Bursa Malaysia retail trading volumes.

On the other hand, CMS management believed that OM Materials (Sarawak) Sdn Bhd may take longer to recover from the pandemic in the second half of FY2021.

As for Malaysian Phosphate Additives (Sarawak) Sdn Bhd plant, RHB Research expected its commencement to be delayed from February 2021 to the end of first half of 2021 due to lockdown measures.

“Nonetheless, we have yet to factor in its potential contribution – representing more earnings upside in second half of 2021.

RHB Research has also lifted CMS’ FY2021-FY2022 earnings by 13%, mainly after accounting for higher associate earnings contributions from Kenanga Investment Bank and Sacofa.

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