KUCHING: RHB Research Institute Sdn Bhd (RHB Research) has lifted Cahya Mata Sarawak Bhd’s (CMS) financial year 2015-2017 forecast (FY15-17F) earnings by 0.6- 1.9 per cent and raised its target price to RM5.86 per share, after incorporating a 4.6 per cent hike in cement selling prices plus a few other revisions.
According to RHB Research, Cahya Mata Sarawak Cement Sdn Bhd, a wholly-owned subsidiary of CMS, has increased prices of its cement products by 4.6 per cent from January 1, 2016.
As the research house had factored in higher costs from the weaker RM, this price increase should directly filter down to the group’s after-tax earnings.
RHB Research noted that CMS’ earnings from the group’s road maintenance and materials and trading divisions have risen ahead of the impending Sarawak state election (slated for July 2016).
The research house believed both divisions may eventually benefit from the RM26 billion Pan Borneo Highway project.
Meanwhile, it also believed that the commissioning of CMS’ new grinding plant in Mambong, Sarawak should help to improve profitability of the group’s cement unit in 2016.
“Additionally, its acquisition of a 50 per cent stake in Sacofa Sdn Bhd (Sacofa) in October 2015 would also see full-year earnings contribution from FY16 onwards,” RHB Research said.
The research house’s FY16/FY17 profit estimates were RM35 million/RM36 million respectively.
Separately, it expected additional contribution from CMS’ property division upon completion of certain developments coupled with possible gains from land sales.
In terms of earnings revision, RHB Research raised FY16/FY17 net profit estimates of CMS’ cement division by 12 per cent/12.2 per cent to RM128 million/RM144.8 million respectively, after incorporating higher selling prices but lower 2016 sales tonnage by 0.3 per cent (customers potentially stocking up ahead of the price increase).
Following the completion of CMS’ acquisition of a 50 per cent stake in Sacofa in late October, the research house also factored in potential associate contributions of RM3 million/RM35 million/RM36 million for FY15/FY16/FY17 respectively. While RHB Research made no change to sales and earnings before interest, tax, depreciation and amortisation (EBITDA) of CMS’ building material trading division, the research house revised up the bottomline by RM8 million to10 million for FY15-17 as it had in the past overprovided for the profit share by the group’s minorities. In addition, the research house noted that Ferro silicon prices have plummeted in tandem with the broad weakness across the commodity complex, thereby dampening earnings of CMS’ 25 per cent-owned OM Materials (Sarawak) Sdn Bhd (OMS).
“Therefore, we now project losses of RM5.8 million/RM5.6 million from profits of RM5 million/RM52.6 million for FY15/FY16 respectively.
“We also slash FY17 earnings contribution to just RM6.4 million (from RM68.8 million previously),” it said.
All in, the revisions above have resulted in the research house’s profit estimates being lifted by 0.6 per cent/1.9 per cent/one per cent for FY15/FY16/FY17 respectively.
RHB Research maintained ‘buy’ on the stock and valued CMS based on a sum of parts (SOP) computation.
Post-earnings revision, RHB Research revisited the SOP valuation of the group and made changes which included raising its valuations for the cement and construction divisions accordingly by a total of RM579 million after taking into consideration higher profit estimates, but the research house kept the target price-earnings (P/E) multiples of both businesses.
RHB Research also cut its discounted cash flow (DCF) valuation for OMS to RM260 million from RM417 million after factoring in lower earnings from this unit from FY15 to FY18. In addition, the research house lowered its projected net cash position as at December 31, 2016 by RM35.4 million, which is the additional cash used to acquire 18.4 million warrants of Sacofa.
The above revisions have thus resulted in RHB Research’s SOP-based target price being raised to RM5.86 per share from RM5.55 per share previously.