• Maintain NEUTRAL, new MYR1.12 TP from MYR1.06, 6% downside. Cahya Mata Sarawak’s 1Q24 core earnings of MYR19.8m were below ours and consensus’ full-year estimates at 18% and 13%. Although its cement wing’s results were disappointing, we maintain FY24F earnings as we expect sales volume to pick up in the coming quarters. As CMS is currently fairly valued and its risk-reward profile appears balanced, we retain our call.

• Results missed estimates. 1Q24 revenue of MYR277.4m was flattish YoY but declined 16.6% QoQ, mainly driven by weaker contributions from cement and oiltools divisions. 1Q24 core PATAMI of MYR19.8m (-37.6% QoQ, -45.5% YoY) fell short of ours and Street’s forecasts at 18% and 13%. The weaker-than-expected results were primarily attributed to the continued losses from the phosphates wing and weaker contributions from the road maintenance and cement segments.

• 1Q24 segmental review. The cement unit posted weaker revenue and PBT of MYR149.2m (-20.6% QoQ; -6.4% YoY) and MYR26.8m (-51.8% QoQ; -28.6% YoY). This was due to a drop in sales volume from the wet weather that slowed construction activities. The road maintenance division booked a stronger PBT of MYR5.3m (>100% YoY) due to higher GP margin from road maintenance, third-party, and instructed works. The property development unit has returned to the black, recording PBT of MYR6.2m in the quarter (>100% QoQ and YoY), thanks to higher GP margin recognised on a deemed land sale transaction. The oiltools unit continues its earnings momentum, with PBT reaching MYR 14.8m (+323.5% QoQ; +221.7% YoY). The phosphate wing still remains in loss-making territory as the plant continued to incur higher opex and depreciation costs.

• We make no changes to our FY24F earnings as we expect CMS to record better earnings in the quarters ahead, especially the cement division (accounting for c.70% of the group’s PBT). However, we switch our valuation methodology for oiltools division (from P/B of 8x to P/E of 5x) as the segment has turned profitable. Our SOTP-derived TP is now MYR1.12 after incorporating a 22% ESG discount (as CMS’ 1.9 ESG score is below the country median of 3.0). With a current valuation of 9.2x near its 5-year historical P/E mean of 8.02x, the 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 the implementation of development projects in Sarawak, electricity shortage, and corporate governance shake-ups. The converse represents the upside risks.

Source: RHB Research - 27 May 2024