Investment Highlights

• We reduce our FY20F net profit forecast by 6% and trim our FV by 5% to RM1.50 (from RM1.58) based on sum-ofparts (SOP) valuations (Exhibit 2), applying an FY20F PE of 18x for its ports division (at 20% discount compared with its peer to reflect its lower margins). However, we maintain our BUY call.

• The earnings downgrade is to reflect the weakened outlook for the logistic sector on the back of the Covid-19 outbreak, which has wreaked havoc across global supply chains and the shipping trade. We reduce our FY20F total container throughput growth assumption to 1% (vs. 4% previously).

• MMC's FY19 core net profit of RM248.0mil (adjusted for an oil spill incident compensation and disposal gains) came in within our expectations but beat consensus estimates by 7%.

• MMC’s FY19 core net profit surged by 28% YoY. The ports & logistics segment posted a stronger performance due to higher volume handled at PTP and Johor Port and consolidation of Penang Port [first full-year earnings. It is also boosted by its associate Malakoff (due to a one-off gain on the disposal of investment in its subsidiary, lower barging and demurrage costs and lower net finance costs) and Senai Airport (due to higher passenger and cargo volumes handled). All these contributions more than offset the weaker showing by the construction segment that was hit by lower work progress from the MRT2 project and the Langat sewerage project. Also helping, were lower finance and administrative costs.

• Moving forward, the group plans to continue investing in its ports infrastructure to improve operational and cost efficiencies. On the construction side, the group will continue to bid for new jobs, particularly the rail projects announced under Budget 2020.

• We continue to like MMC due to its cheap implied valuation for the group’s port business (14x forward PE). We also believe that when the Covid-19 outbreak is over, MMC’s ports & logistics segment will continue benefiting from the resilient outlook in the region’s port sector, underpinned by investments in the manufacturing sector that generates tremendous inbound and outbound throughput.

• The weak currency and cheaper port charges are also positive for the port operator as shipping lines are seeking ways to rationalize their cost structures amidst a tough operating environment.

Source: AmInvest Research - 26 Feb 2020