CMSB still has upside

Those who read my previous postings on CMSB knew that I am bullish on its potential and outlook.

After reading RHB's latest report on CMSB dated 19 March 2014, I still think there is upside to the stock

RHB has raised the target price from RM9.22 to RM10.37. Even though the share price has almost tripled since a year ago, I think there is still upside in the share price given its growth potential and conservative assumptions in the SOP valuation by RHB.

In a report released today, Maybank has raised the target price from RM8.40 to RM10.50. Net profit for FY14/15/16 is expected to jump 18.6%/21.1%/21.6% respectively.

Besides, I think the valuation by RHB is slightly conservative, given that:

1. Its cement division in Sarawak which is a monopoly business and has high barrier of entry due to logistic challenges, was valued at only 16.6x, as compared to about 19x for West Malaysia

2. Target price will be raised further in a few months' time when the valuation base year is rolled forward to FY15 (cement division and construction material division valued using FY14 earnings)

3. Assuming no extension to the state road maintenance concession was in my opinion unlikely. With their expertise, experience, dominance, and maybe their substantial assets for the maintenance works, I think it is way too conservative to assume no extension at all. At most, the scope of works would be reduced, I think.

4. Assume 50% of OM base case estimates for its OMS smelting plant. And mind you the valuation for OMS has yet to be included in arriving at RM10.37 target price

5.Have not factored in any value for its property development in Samalaju

Confusion over offer for PUNCAK?

News has reported that the total offer for the 4 water players in Selangor has been reduced by RM2b from RM9.65b to RM7.65b.

The share price of Gamuda and Puncak has reacted negatively to the news.

Recall, the Selangor State Government had offered RM9.65b to the 4 water players in the state. And for SPLASH in which Gamuda has 40% stake, it included surplus of assets over liabilities which was believed amounting to about RM2.2b. Together with the offer of RM250.6mn for equity contribution plus 12% roe annually, the offer to acquire SPLASH came to about RM2.4b-2.5b.

However, in the subsequent offers in November 2013 and February 2014, the item of surplus of assets over liabilities was removed. This resulted in SPLASH rejecting the offer as the amount offered was 90% lower than the amount offered in February 2013. SPLASH is expected to receive only RM250.6m versus about RM2.4b-2.5b offered about a year ago. If SPLASH had accepted the offer, the would lead to disposal loss of RM2.3b.

What I would like to highlight here is that the saving of RM2b mainly comes from the reduction in offer price for SPLASH and the offer to PUNCAK is largely unaffected, I believe.

With the selldown in PUNCAK, could this present a good opportunity to accumulate the stock?

If I understand it correctly, PUNCAK is expected to receive RM1424m (RM1117.5m for 100% stake in PNSB + RM306.5m for 70% stake in Syabas). This works out to be RM3.46 per Puncak share or RM3.15 per Puncak share including new shares from the conversion of warrants.

The disposal of water assets is expected to reduce the group's debts substantial and both assets and liabilities are acquired simultaneously. Besides, it has oil & gas business.

20 pre-qualified tier 1 developers for Kwasa Damansara township development

20 pre-qualified tier 1 developers for Request for Proposal (RFP) for Kwasa Damansara township in Sungei Buloh, Selangor.

Bandaraya Developments,
Bandar Utama City Corporation,
DRB-HICOM,
Eastern and Oriental,
Goldis,
Gamuda,
Guocoland Malaysia,
IJM Land,
IOI Properties,
I&P Group,
Mah Sing Group,
MRCB,
PKNS,
Putrajaya Holdings,
SP Setia,
Sunway,
Tropicana Corporation,
UEM-Sunrise,
WCT and
YTL Corporation.

CMSB fulfilling Yeoman's 3-Rights criteria

CMSB is a stock which I deeply believe fulfilling Yeoman 3-Rights investment criteria. I.e. right business, right price and right management.

In fact CMSB offers more than 3Rs. It is the sole cement manufacturer in Sarawak, and has other 5 inter-related core divisions that complement each other and are expected to benefit from the growing Sarawak economy, especially SCORE

According to research report, the barrier of entry is very high for competitor to penetrate into cement business in the state given the sole limestone hill is owned by CMSB, coupled with logistic challenges due to shallow port that makes it impractical for competitor to import clinker into the state.

Add more CMSB subsequent to previous purchase. At current p/e multiple, I still strongly feel that the market has yet to appreciate its potential and competitive advantage.