Investment Highlights

• We initiate coverage on MMC Corporation (MMC) with a BUY recommendation and FV of RM1.66 based on sum-of-parts (SOP) valuations.
• We believe MMC has been shedding excess “weight” in recent years, transforming itself from a conglomerate (of which growth is typically capped by business operations that are too diverse) to predominantly a ports & logistics player (with the ports & logistics division contributing to 60% and 39% of group turnover and net profit in FY18 respectively).

• The “trimming” came largely from the listing of Gas Malaysia in 2012 (reducing MMC’s effective stake in the sole licensed seller of natural gas in Peninsular Malaysia to 30.9% from 41.8%) and Malakoff Corp in 2015 (paring down its stake in the second largest power producer in Malaysia to 37.7% from 51%).

• Our investment case for MMC is based on: 1. The resilient outlook in the region’s port sector, underpinned by investments in the manufacturing sector that generates tremendous inbound (feedstock) and outbound (finished product) throughput. There has been a significant relocation of the manufacturing base by multi-national companies out of China to the region due to rising labour and land costs, exacerbated by the US-China trade war; 2. To capitalize on the growth prospects, MMC has put in place expansion plans for container handling capacity (Port of Tanjung Pelepas (PTP) and Penang Port) and liquid bulk (Johor Port), and infrastructure upgrading (Northport); and 3. The cheap implied valuation for MMC’s port business of 14x forward P/E vs. over 20x of its peer, Westports. This is unjustified given that MMC’s combined annual port capacity of 21.3mil TEUs annually is 1.5x Westports’ 14mil TEUs (Exhibit 4).

• We expect MMC’s earnings to grow by 75% and 6% in FY19–20F driven largely by: (1) the recent tariff hike in most of the ports MMC owns; (2) better margin from its’ ports division as a result of effective cost savings measurement; and (3) full consolidation of Penang Ports’ account.

• For FY20F, we project its ports & logistics division to contribute to 56% of group earnings, followed by engineering & construction (21%) and energy & utilities (23%).

Source: AmInvest Research - 24 Sept 2019