Investment Highlights

• We raise our FY20–21F forecasts by 42%, 33% and 25% respectively, and increase our fair value by 32% to RM1.49 (from RM1.13) based on sum-of-parts (SOP) valuation (Exhibit 3). This values its ports division at 16x FY21F EPS (a 30% discount to its peers' historical average to reflect its lower margins). We maintain our BUY recommendation.
• MMC's 1HFY20 core net profit of RM154.1mil (adjusted for disposal gains) beat expectations, accounting for 74% and 73% of our full-year forecast and consensus estimate respectively. We believe the key variance against our forecast came largely from better-than-expected throughput volume handled by PTP, and higher-thanexpected share of results of associates, particularly Malakoff, and better margins recorded.
• MMC’s 1HFY20 core net profit improved by 18% YoY, thanks to higher volume handled at Pelabuhan Tanjung Pelepas (PTP) and higher share of results of associates, namely Malakoff (due to contribution from Alam Flora following the completion of its acquisition on 5 Dec 2019, as well as lower operations and maintenance costs). Also helping were higher interest income and lower operating expenses at the MRT2 project, sale of land at Senai Airport City (SAC), as well as lower operating costs for 1HFY20.
• However, these were partly offset by the lower volume handled at Northport, Johor Port and Penang Port, weaker contribution from logistics services (particularly Kontena Nasional), slower work progress from underground work packages for the MRT2 project, and lower passenger and cargo volumes at Senai Airport. 
• The earnings upgrade is to largely reflect: (1) more resilient performance of ports with throughput change of a 7% contraction in FY20F, followed by a 5% growth in FY21F (vs. a 10% contraction in FY20F and 7% growth in FY21F projected previously); and (2) higher share of profits from associates, particularly, Malakoff.
• MMC plans to continue investing in its ports infrastructure and focus on resource optimization 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 its peer, Westports’ capacity of 14mil TEUs annually). We see value in MMC Corp with its port business valued at 9x forward P/E on a stand-alone basis.

Source: AmInvest Research - 25 Aug 2020