Investment Highlights

• We maintain our BUY call, forecasts and FV of RM1.50 based on sum-of-parts (SOP) valuations (Exhibit 1) that value its ports division at a FY20F PE of 18x (at 20% discount compared with its peer to reflect its lower margins).

• We came away from MMC’s analyst briefing yesterday feeling positive. The key takeaways are as follows:

• The company still expects moderate growth for its seaport business despite the uncertain global economic and trade outlook amidst the Covid-19 outbreak. This is backed by the inelastic demand from its customers, largely Malaysian exporters. Except for PTP, MMC’s ports, i.e. Johor Port, Penang Port and Northport, focus more on gateway cargoes produced at industrial areas near the ports. There could even be an increase in export cargoes’ volume as international buyers look for alternative sources of products outside of China due to the supply disruption in China. In addition, MMC’s strategic partnership with Maersk (one of the world’s biggest container carrier) effectively gives PTP the first right of refusal to handle cargoes of Maersk and the 2M Alliance (a shipping alliance comprising Maersk and MSC). The company said that the customer-cum-shareholder has been satisfied with its operational capabilities which could translate to a further increase in volume in future.

• For the construction segment, an outstanding order book of RM6.62bil should keep the segment busy over the next three years. The division intends to bid more aggressively in the “niche segments” such as marine, utilities, and rail-related projects. Also helping, is a steady pipeline of internal jobs such as port expansion and development of infrastructure (i.e. Sungai Pulai Bridge project). It is also eyeing more work packages from the PGU-I gas pipeline replacement project (MMC won the maiden work package when the project was first launched in the 1990s).

• MMC will intensify its cost-cutting initiatives including to renegotiate contract terms with key suppliers, further optimize staff headcount and increase operational efficiencies.

• We continue to like MMC due to its cheap implied valuation for the group’s port business (14x forward PE). When the Covid-19 outbreak is over, we also believe that 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 - 28 Feb 2020