Business as usual for CMS with road contract extension

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To note, CMS currently maintains 6,260km of state roads, as well as 680km of federal government roads within Sarawak.

KUCHING: Analysts called it business as usual for cement maker Cahya Mata Sarawak Bhd (CMS) as it receives a letter from the Government of Sarawak extending its road maintenance contract for a period of six months from July 1, 2019 to December 31, 2019 on the same terms and conditions.

MIDF Amanah Investment Bank Bhd (MIDF Research) understood that this was a renewal of an existing contract with the state government. Accordingly, there was no additional business and commercial risks to be assumed by the company arising from the contract extension.

“Altogether, the contract is worth RM94 million in earnings prospect that will positively contribute to CMS’ bottomline,” it said in a report yesterday.

“The management had earlier expressed confidence of receiving this extension. To recall, its previous renewal had commenced in July 2018, which carries RM180 million worth of contract extension up until June 2019.”

To note, the company currently maintains 6,260km of state roads, as well as 680km of federal government roads within Sarawak.

AmInvestment Bank Bhd (AmInvestment Bank) in a separate note believed the extension was a short-term measure pending the negotiation and finalisation for the renewal of the concession on a longer term basis.

“Recall that CMS has been awarded a 15-year contract of state road maintenance in April 2003, and a short-term extension of the contract in December 2017 and June 2018 for six months and one year respectively,” it highlighted. “We have taken into account the extension in our forecasts.

“We project the state road concession to contribute RM8.4 million or about three per cent of total net profit in FY19F.”

Moving forward, MIDF Research saw that CMS was also eyeing more state road concession that stretch to about 30,000km.

“We believe the company is well positioned to maintain its dominant role in the state’s road maintenance operations. This was on the back of its proven track record and cost advantages, built up over the years.

“We make no change to our forecasts, as we have previously taken into account the possible contract extension.”

AmInvestment Bank maintained its view that a sustainable funding model for public infrastructure development in Sarawak is by tapping into federal funds versus draining the state reserve of Sarawak.

“In any case, we believe that the market could have adequately priced in the potential of a state reserves fuelled infrastructure boom in Sarawak – ahead of the Sarawak state election which must be held by September 2021 – with CMS share price having recovered strongly from the year-low of RM1.92,” it added.

“We remain cautious on CMS due to the cutback in public infrastructure spending as the federal government tightens its belts. We are also mindful of the potential

threat to the market dominance of existing players in the construction and building materials sector in Sarawak and altered political landscape in Malaysia after the 14th general election.

“Increased competition could put a dent on CMS’ prospects of winning new construction jobs, securing extensions or its road maintenance concession, as well as sustaining high margin for its construction, road maintenance and cement businesses.”