Cahya Mata Sarawak (CMS MK) continues to track positively towards increased earnings delivery, supported by strong performance in its cement and Oiltools divisions. The company maintains a BUY call with an unchanged target price of RM1.60, based on a valuation of 10x FY25E PER, which reflects a price-to-book ratio of 0.4x and aligns with the company's RNAV per share estimate of RM3.38 as cited by Maybank Stock Broking House.
CMS's cement division has shown resilience despite a challenging first half of the year. Cement volume sales were relatively flat quarter-on-quarter in 2Q24 due to adverse weather conditions affecting construction activities in Sarawak. For the first half of 2024, volume was down 4-6% year-on-year. However, the division's profit before tax margin expanded by 4.8 percentage points year-on-year to 23.6%, driven by reduced clinker costs and improved operational efficiencies. The recovery of the Malaysian Ringgit is expected to further support margins, with the company focusing on enhancing operational, logistics, and distribution efficiencies.
The Oiltools segment has shown notable strength, with its order book reaching approximately RM0.5 billion by the end of June 2024. Active tenders are anticipated to boost the order book further. Oiltools reported a 12% increase in topline revenue and a significant 73% growth in profit before tax in 1H24, with a PBT margin of 18.1%. This performance has made Oiltools the second-largest contributor to the group's PBT, contributing 26% in 1H24. With the current year's PBT already at RM28 million, FY24E PBT is expected to exceed the RM29 million recorded in FY23.
In terms of its phosphate operations, CMS faces delays in arbitration hearings with SESCO, which have been rescheduled to May 2025 from August 2024. The phosphate operation recorded a loss before tax of RM40 million in 1H24 due to preparation costs for commercialisation and a RM16 million write-down of inventories. The earnings forecast for FY24E has conservatively accounted for a RM108 million loss for this segment.
Despite the challenges, CMS's overall outlook remains robust, bolstered by strong performance in its core divisions and operational improvements. The company's current valuation remains attractive, and it is well-positioned to benefit from further recovery in its sectors. The BUY recommendation is reaffirmed, with the target price set at RM1.60, reflecting a 22% upside potential.
