Investment Highlights

• We maintain our forecasts and FV of RM1.13 based on sum-of-parts (SOP) valuation (Exhibit 1), valuing its ports division at 16x FY21F EPS. This is at 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.

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

1. The group remains cautiously positive on its port segment outlook, mainly driven by trade diversion as major shipping lines restructure their routes (less point-to-point, resulting in a greater need for cargo transshipment), in response to the weak container volumes amidst the economic downturn.

The group believes its ample capacity in storage facilities and reefers at PTP have attracted more transshipment cargoes to call at the port as shipping lines await the borders to reopen. YTD, MMC's largest port, i.e. PTP (contributes up to two-thirds of the total container volume handled at MMC's port) was still registering a slight growth of 2% YoY (despite a 6% YoY contraction seen in April 2020).

Meanwhile, Johor Port and Penang Port experienced a slowdown (both containerised and conventional throughput) during the movement control order (MCO) period, but volumes are expected to recover following the resumption of factory operations around the port. On the other hand, the group is more cautious on Northport's outlook as it expects lower import/export activities amidst the Covid-19 pandemic. Gateway cargoes contribute to more than half of the total container throughput volume at Northport.

2. MMC guided for a single-digit contraction for its total container throughput volume at its ports in FY20 (vs. our more conservative projection of a 10% contraction). As expected, the group expects a soft 2Q ahead.

3. For the construction segment, the group has continued to work on replenishing its order book. It is pitching to the government to kick-start the MRT 3 project, as well as eyeing the PGU-I gas pipeline replacement project and other EPC work packages.

4.The group will continue its aggressive cost-cutting initiatives amidst the challenging operating environment. it is currently assessing and monitoring closely its subsidiary, namely Senai Airport to reduce its variable costs as well as deferring its capex (part of circa RM400mil capex to be deferred) to conserve cash as the airport faces an unprecedented plunge in traffic due to the Covid-19 pandemic.

• 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 multinational 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 12.5x forward P/E on a stand-alone basis.

Source: AmInvest Research - 22 May 2020