CMS Expected to Remain a Leader in State Road Maintenance Ops
Maintain buy with an unchanged target price (TP) of RM3.85: Cahya Mata Sarawak Bhd (CMS) has received a letter from the government of Sarawak informing that its road maintenance contract has been extended for a period of six months from July 1, 2019 to Dec 31, 2019 on the same terms and conditions.
We understand that it is the renewal of an existing contract with the state government. Accordingly, there are 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 prospects that will positively contribute to CMS’ bottom line.
Management had earlier expressed confidence in receiving this extension. The previous renewal commenced in July 2018, carrying a RM180 million worth of contract extension up to June 2019. The company currently maintains 6,260km of state roads as well as 680km of federal government roads in Sarawak. Moving forward, the company is also eyeing more state road concessions 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 is 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 possibility of the contract extension. We maintain our “buy” call on the stock with a TP of RM3.85. This is after ascribing blended price-earnings ratio multiples within the range of eight times to 12 times for construction, roadworks and other associated divisions.