Investment Highlights

• We maintain our forecasts and FV of RM1.13 based on sumof-parts (SOP) valuation (Exhibit 1) valuing its ports division at 16x FY21F EPS (a 30% discount to its peers' historical average to reflect its lower margins and a growing consensus of a steep downturn in the global economy, and hence global trade, due to the Covid-19 pandemic). We maintain our BUY recommendation.

• MMC's 1QFY20 core net profit of RM63.9mil (adjusted for disposal gains) came in at 31% and 27% of our full-year forecast and consensus estimate respectively. We consider the results within expectations as we expect weaker quarters ahead in the fallout of the Covid-19 pandemic.

• MMC’s 1QFY20 core net profit eased slightly by 2% YoY, mainly due to lower volume handled at Northport, lower contribution from logistics services (particularly Kontena Nasional), lower work progress from underground work packages for the MRT2 project, lower passenger and cargo volumes at Senai Airport and higher other operating expenses. These were partly cushioned by higher cargo volumes handled at Pelabuhan Tanjung Pelepas (PTP) and Johor Port, as well as better results of associates, namely Malakoff (due to contribution from Alam Flora following the completion of its acquisition on 5 Dec 2019) and Gas Malaysia (on the back of higher gas contribution and lower other costs of sales). Also helping were higher interest income and lower operating expenses at the MRT2 project.

• MMC plans to continue investing in its ports infrastructure and expand capacities to improve operational and cost efficiencies. On the construction side, the group will continue to bid for new jobs while focusing on the execution and timely completion of its existing projects.

• The outlook for the port sector in the region (Malaysia included) is resilient, underpinned by global trade and investments in the manufacturing sector that generate tremendous inbound (feedstock) and outbound (finished product) throughput for ports. There have been significant relocations of the manufacturing base by multi-national companies out of China due to the rising labour and land costs, exacerbated by the US-China trade war. MMC Corp is well positioned to capitalise on these via its stable of five ports in Peninsular Malaysia with a total container handling capacity of 21.3mil TEUs annually (50% higher than peer Westports’ capacity of 14mil TEUs annually).

• While we are mindful of the soft patch ahead amidst a major slump in the world economy in the aftermath of the Covid- 19 pandemic, we believe the selldown on MMC Corp has been overdone. We see value in MMC Corp with its port business valued at 12x forward P/E on a stand-alone basis.

Source: AmInvest Research - 21 May 2020