Cahya Mata downgraded on higher risk to earnings

PETALING JAYA: AmInvestment Bank has downgraded its call for Cahya Mata Sarawak Bhd (CMS) to “underweight” from “buy” and lowered its fair value by 37% to RM2.48 from RM3.91 previously, due to increased earnings risk for the company.

In its report today, AmInvestment Bank said it has raised CMS’ FY18 net profit forecast by 20% to largely reflect better performance from CMS’ associate OM Materials but FY19-20 earnings have been cut by 5% and 14% respectively on weakened prospects for the construction and building materials sectors in Sabah and Sarawak.

“Having recovered by a whopping 59% to RM3.05 from the post 14th General Election low of RM1.92 on May 21, 2018, we believe the stock’s risk premium could now have overshot to the downside (versus overshooting to the upside previously),” it said.

The research house highlighted three potential events that could affect CMS’ performance over the short to medium term namely, the cutback in public infrastructure spending nationwide; the change in landscape for the construction and building materials sectors; and the performance of the group’s various associates particularly OM Materials.

According to AmInvestment Bank, the Sarawak state government has an ambitious plan for public infrastructure spending, including the construction of a new coastal highway and the second trunk road, both of which are multi-billion ringgit projects that would translate to construction jobs for contractors and demand for building materials.

“However, given the scale and size of the projects, we believe it will need funding support from the federal government. We are mindful that this will be a major challenge given the federal government’s adherence to fiscal prudence and sustainability, resulting in a significant cutback in public infrastructure spending across the nation, and Sarawak will have to compete with other states in Malaysia, which are equally hungry for federal funding to finance their respective projects,” it added.

It expects more competition in the construction and building materials sectors in Sabah and Sarawak, potentially arising from open bidding for government jobs, especially federal-funded projects.

Competition could also come from open bidding for road maintenance concessions, especially for federal roads in Sabah and Sarawak as well as the increased participation of peninsular-based companies in the construction, cement and aggregate markets in Sabah and Sarawak.

“These will put a dent on CMS’ prospects of winning new construction jobs, securing extensions for its road maintenance concessions, as well as sustaining high margins for its construction, road maintenance and cement businesses,” it added.

Note that CMS’ outstanding construction order book stands at RM1.3 billion, coming entirely from the Pan Borneo Highway. It has two road maintenance concessions covering 241km of federal roads and 5,847km of state roads in Sarawak.

It is also the sole cement producer in Sarawak with an estimated cement consumption of 1.6 million tonnes in 2018.

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