Overreaction to weak 1Q16 results

The market could have overreacted to the weak 1Q16 earnings and default concerns at OMS with the MYR2b YTD drop in CMS’ market cap that is 3x the potential write-off from OMS. While OMS’ forex loss could still affect its 2Q16 headline earnings, core earnings would improve in the coming quarters. Current share price undervalues its stable core businesses and assets including Sacofa’s concession and its property landbank. Sentiment would improve on the potential positive catalysts. Upgrade CMS to a BUY (from HOLD) at lower TP of MYR3.80.

Near term concern

CMS’ weak 1Q16 earnings were hit mainly by wet weather and OMS’ forex losses. The significant forex loss was unprecedented for CMS as its main businesses have small forex exposure. Although 2Q16 headline net profit would still be impacted by OMS’ forex losses, its core net profit would recover after the temporary hip-cup in 1Q16. Meanwhile, OMS’ default probability is low as its loan restructuring would likely go through.

Fundamentals still intact

Near term potential positive catalysts include: i) clinching construction works from Pan Borneo Highway, ii) extension of Sacofa’s concession, iii) turnaround of OMS on sustained recovery in ferrosilicon price and iv) successful restructuring of OMS’ loans. Long term prospect is bolstered by Sacofa’s expansion plans and its integrated phosphate plant. CMS’ healthy balance sheet would support its capex to drive growth.

New SOP-TP of MYR3.80 excludes OMS

We cut our 2016-2018 EPS by 21-34% on: i) weak 1Q16 core earnings, ii) delay in construction material demand from Pan Borneo Highway to end- 2017 from early-2017 and iii) assuming losses from OMS in 2017 and 2018 given the uncertainty. Our new SOP-based TP is MYR3.80 (-17%) after we lower our earnings forecasts and remove OMS from our valuation.

Source: Maybank Research - 19 May 2016