Cahya Mata Sarawak Bhd
(Dec 1, RM3.77)
Upgrade to buy call with an unchanged target price (TP) of RM4.10: Cahya Mata Sarawak Bhd’s (CMS) business units all did better, reporting a decent set of third quarter of 2016 (3Q16) results despite the temporary setback earlier this year.
Its 25%-owned OM Materials (Sarawak) Sdn Bhd (OMS) is back on the path of recovery after closing its hedging position in 2Q16. We upgrade the stock back to “buy” (from “neutral”) in view of a second consecutive sequential improvement in earnings.
There is no change to our sum-of-parts-based TP of RM4.10 (15% upside).
CMS posted a profit of RM58.7 million in the third quarter ended Sept 30, 2016 (3QFY16), up 30.2% quarter-on-quarter. The kitchen-sinking exercise from the close of its hedging position at OMS helped to turn associates earnings back into the black.
Furthermore, performances at all its other business units normalised after weak starts to FY16.
Meanwhile, nine-month period of financial year 2016 result reached 73% and 76% of ours and street estimates, broadly in line.
Moving forward, we expect OMS to see gradual improvements as the remaining 10 furnaces are progressively commissioned although a full turnaround is only expected from 3QFY17 at the earliest.
Traditional businesses such as cement, materials and trading, and construction and road maintenance units are all set to continue to benefit from the RM16 billion Pan Borneo Highway (Sarawak) project and Sarawak Corridor of Renewable Energy development, and a 50% stake in Sacofa Sdn Bhd (the sole telecommunication tower service provider in the state), would see full-year earnings contribution from FY16 onwards.
We believe most investors may become more bullish on the counter after two consecutive sequential improvements in its quarterly core earnings.
As we deem the results to be largely in line with our estimates, we make no changes to our earnings projection. OMS remains the single largest risk within the group as it is dependent on the success of OMS’s turnaround exercise in the coming quarters. — RHB Research, Dec 1