Analysts positive on extension of CMS’ state road maintenance concession in Sarawak

Analysts are generally positive about CMS’ contract extension for the long-term management and maintenance of state roads in Sarawak as it would help to address the group’s earnings overhang.

KUCHING: Analysts are generally positive about Cahya Mata Sarawak Bhd’s (CMS) contract extension for the long-term management and maintenance of state roads in Sarawak as it would help to address the group’s earnings overhang.

In a filing on Bursa Malaysia, its subsidiary’s (CMS Works Sdn Bhd) wholly-owned CMS Roads Sdn Bhd (CMSR) had entered a 15-year road maintenance contract with the Sarawak government for the maintenance of state roads in Sarawak.

It noted that the contract extension, starting from January 1, 2018 to June 30, 2018, is estimated to have a contract sum of RM87.7 million and it is expected to contribute positively to the group’s earnings during the tenure of the contract.

In a report, Maybank Investment Bank Bhd’s research arm (Maybank IB Research) opined, “We are positive on the six-month extension for CMS’ state road maintenance concession in Sarawak as it would help to address the earnings overhang, especially with the concession ending on December 31, 2017.”

It further pointed out that the rationale for this extension is to facilitate negotiations and to finalise terms for a renewal of a long-term agreement.

“Thus, we do not discount the possibility that CMS would secure a longer term concession on prospectively better renewed terms once the details have been finalised,” the research team said.

With the six-month extension being on the existing terms, Maybank IB Research retained its earnings forecast and set a sum-of-parts target price of RM4.50 per share.

Meanwhile, the research arm of AmInvestment Bank Bhd (AmInvestment) believed that the extension is a stop-gap measure pending the negotiation and finalisation for the renewal of the concession on a longer term basis.

It said, it maintained a sum-of-parts-based fair value as the six-month extension is only expected to add one sen to a fair value of RM4.46 per share.

“However, if CMS is able to secure the renewal for the concession for another 15 years based on similar terms and conditions, our calculation shows that this could fetch an net present value of 35 sen (based on a discount rate equivalent to CMS’s weighted average cost of capital of 8.9 per cent), potentially boosting our fair value by eight per cent to RM4.80 (per share),” it said.

AmInvestment maintained a ‘buy’ call on the stock.

It said, “We continue to like CMS for the strong demand for cement and building materials underpinned by variousmega infrastructure projects in Sarawak, its steady growth of construction and road maintenance works including the Pan-Borneo Highway project awarded to CMS (joint venture with Bina Puri Holdings), and sustained demand from its property development both in Kuching and Samalaju, and potential land sale of its current undervalued landbanks.”

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