KUCHING: The team at AmInvestment Bank Bhd (AmInvestment Bank) is turning cautious on Cahya Mata Sarawak Bhd (CMS) due to the cutback in public infrastructure spending nationwide, including East Malaysia.
The firm in a report yesterday said it was mindful of the change in the competitive landscape for the construction and building materials sectors in East Malaysia, following the change in the political scene post-GE14 in 2018, coupled with the Sarawak state election by September 2021.
“Increased competition will put a dent on CMS’ prospects of winning new construction jobs, securing extensions for its road maintenance concessions, as well as sustaining high margins for its construction, road maintenance and cement businesses,” it said in its note yesyerday.
“Having recovered by a whopping 59 per cent to RM3.05 from the post-14th general election (GE14) low of RM1.92 on May 21, 2018, we believe the stock’s risk premium could now have overshot to the downside.”
AmInvestment Bank went on to identify three potential drivers/dampeners to CMS’ performance over the short to medium term.
These include a cutback in public infrastructure spending nationwide, including East Malaysia; the change in the competitive landscape for the construction and building materials sectors in East Malaysia; and the performance of CMS’ various associates, particularly, OM Materials.
“The Sarawak state government has an ambitious plan for public infrastructure spending, including the construction of a new coastal highway and the second trunk road, which will translate to construction jobs for contractors and demand for building materials.
“However, given the scale and size of the projects, AmInvestment Bank believed it will need funding support from the federal government.
“We are mindful that this will be a major challenge given the federal government’s adherence to fiscal prudence and sustainability, resulting in a significant cutback in public infrastructure spending across the nation; and Sarawak will have to compete with other states in Malaysia, which are equally hungry for federal funding to finance their respective projects.”
AmInvestment further expect more competition in the construction and building material sectors in East Malaysia, potentially arising from: open bidding for government jobs, especially federal-funded projects; open bidding for road maintenance concessions, especially for federal roads in East Malaysia; and the increased participation of peninsular boys in the construction, cement and aggregate markets in East Malaysia.
“These will put a dent on CMS’ prospects of winning new construction jobs, securing extensions for its road maintenance concessions, as well as sustaining high margins for its construction, road maintenance and cement businesses,” it said.
At present, CMS’ outstanding construction order book stands at RM1.3 billion, coming entirely from the Pan Borneo Highway.