• Maintain NEUTRAL, new MYR1.06 TP from MYR1.14, 9% upside. Cahya Mata Sarawak’s FY23 core earnings of MYR94.5m were below ours and consensus’ full-year estimates at 96% and 86%. While its cement wing demonstrated sequential improvements, we slash our FY24F earnings 12% to reflect the subdued sales volumes from the property and construction units, and the prolonged losses by CMS’ phosphate plant. The stock is currently fairly valued, and the risk-reward profile appears balanced, leading us to retain our NEUTRAL call.

• Results missed estimates. CMS’ FY23 revenue of MYR1.2bn improved 19% YoY, mainly driven by higher contributions from cement and oiltools divisions. 4Q23 core PATAMI of MYR24.6m (+19% QoQ, +>100% YoY) brings FY23 figure to MYR94.5m (-55.4% YoY) – falling short of ours and Street’s forecasts at 96% and 86%. The weaker-than-expected results were primarily attributed to the widening losses from the phosphate wing and weaker contributions from the road maintenance and strategic investments segments, and the loss-making property development.

• FY23 segmental review. The cement unit posted higher revenue and PBT of MYR681.7m (+13% YoY) and MYR146m (+82% YoY). The improved profitability stems from a rise in cement sales and improvement in gross margin due to lower input costs. The road maintenance division booked a weaker PBT of MYR13.7m (-20% YoY) due to lower sales and a squeeze in gross margins. The property development slid into loss before tax (LBT) of MYR2.2m (vs PBT of MYR33.2m in FY22), due to slower property sales and absence of land sales. The oiltools unit made a meaningful contribution of MYR29.3m to the PBT. The phosphate wing’s LBT widened to MYR156.7m (2.5x YoY) as the plant continued incurring higher opex and depreciation.

• Valuation. While we lower our FY24F earnings by 12% to account for the slower sales volumes from the property and construction wings, and prolonged losses from the phosphate plant, we maintain our FY25-26F earnings pending post-results briefing and guidance. Our SOTP-derived TP is now MYR1.06 after incorporating a 22% ESG discount (as CMS’ 1.9 ESG score is below the country median of 3.0). With its current valuation of 7.4x near its 5-year historical P/E mean of 8.6x, CMS’ risk-reward profile appears balanced, leading us to retain our NEUTRAL call.

• Key downside risks include a plunge in cement prices, delays or cancellations in implementing development projects in Sarawak, electricity shortages, and corporate governance shake-ups. The converse represents the upside risks.

Source: RHB Research - 27 Feb 2024