CMSB: Earnings plummeted but value emerged!

Background

Cahaya Mata Sarawak Bhd ('CMSB') is involved the manufacture of clinker and cement; construction and quarry operations; and provision of financial services, and property development, trading, and services. Due to its political connection, CMSB has grown steadily into one of the largest group in Sarawak. 

Results Update

Yesterday, CMSB announced a very disappointing set of result. Its net profit plummeted by 99% q-o-q or 98% y-o-y to RM1 million while revenue dropped by 32% q-o-q or 29% y-o-y to RM347 million.

The y-o-y drop in its revenue was lower revenue from the Construction Materials  & Trading Division and  Construction & Road Maintenance Division. Its PBT dropped by 76% to RM22.9 million in 1Q16 from RM95.0 million in  1Q15, on the back of lower revenue, lower gross  profit margin and share of substantial losses in associates. Most Divisions reported lower PBT, with the steepest decline contributed by the Cement Division (where PBT dropped y-o-y from RM29.37 million to RM9.62 million). To add to the slide, share of result of associates turned in a loss of RM16.16 million as compared to a profit of RM13.73 million previously. This is likely to be contributed by a 20%-owned associate, OM Sarawak, which is a ferrosilicon alloy (FSA) & manganese smelter.


Table: CMSB's last 11 quarters' P&L


Chart 1: CMSB's last 11 quarters' P&L  

Outlook for the under-performing divisions:

1) Clinker & Cement; Building Material; and Construction

These construction-related divisions should do well when the Pan Borneo Highway construction begin this year.

2) Ferrosilicon Alloy

The outlook for ferroalloy is uncertain due to challenging outlook for the steel industry (go here). The good news is the supply pipeline has slowed and the prices are off the bottom. In its reports to its shareholders, OMH (the controlling shareholder of OM Sarawak) seems to be cautiously optimistic (go here & here). Thus I believe that OM Sarawak may be able to report a better set of result in line with some improvement in the steel industry.

Overall, I believe CMSB had suffered abnormally bad quarter for the start of 2016. It may drag on to QE30/6/2016 if we factored in some delay due to the state election. Since the election is over, construction projects should pick up pace and the second half of the year should be better.

Financial Position

CMSB has a healthy financial position as at 31/3/2016. Its current ratio stood at 2.4 times while total liabilities to equity stood at 0.4 times.

Valuation

CMSB (closed at RM3.25 as at 12.30pm) has a PE multiple of 19 times (based the last 4 quarters' EPS of 17.2 sen). At this PER, CMSB is deemed overvalued.

Technical Outlook

CMSB's current decline came after it broke the important support from the horizontal line at RM4.70 - as highlighted earlier. The selldown was so strong that it went through the horizontal line at RM3.80. The next support is likely to come from the horizontal line at RM3.00. (Note: CMSB was trading at RM3.27 as at 3.17pm).


Chart 2: CMSB's weekly chart as at May 17, 2016_11.00 (Source: ShareInvestor.cm)


Chart: CMSB's monthly chart as at May 17, 2016_11.00(Source: ShareInvestor.cm)

Conclusion

The sharp drop in share price could be a good opportunity to get into a stock that will give an excellent exposure to one of the fastest growing state in Malaysia- Sarawak- as well as a safe proxy play for the on-going Pan Borneo Highway project. The company has a healthy financial position. Its financial performance has been very good until last quarter, which is likely to be an abnormality. Based on these, CMSB is a good buy now for long-term investment. 

Note: 
 
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, CMSB.