Investment Highlights

• We raise our FY20F–FY22F net profit forecasts by 3%, 5% and 3% respectively, and increase our FV by 5% to RM1.56 (from RM1.49 previously) 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. We maintain our BUY recommendation.

• We came away from MMC's analyst briefing yesterday feeling positive. The key takeaways are as follows:
  • MMC guided for flattish/small growth in container throughput volume at the Port of Tanjung Pelepas (PTP) in FY20F as it continues to gain in market share from neighbouring ports (driven by competitive rates and improved operational efficiencies) and benefit from trade diversion.
    
    Already, cumulatively in 1HFY20, PTP recorded a 1% YoY growth in throughput volume (PTP contributes ~65% of MMC’s total container throughput volume). This helped to cushion a 7% fall in container volume in other ports (Johor Port, Northport and Penang Port), resulting in its total container throughput contracting by only 2%. On a quarterly basis, PTP has already seen the worst in 2QFY20 with container throughput volume shrinking by 7% YoY. PTP has already been registering an uptick in the number since 2HFY20F.
     
  • Meanwhile, PTP continues its efforts to rationalise costs to improve margins and operational efficiencies. To date, the port has managed to save up to RM12.2mil from the initiatives including procurement contract renegotiation, MSS scheme, overtime reduction, insourcing of engineering work, etc. (Exhibit 3).
    
    Over the longer term, the group is also investing RM140mil to expand its free trade zone (to attract more multinational companies to set up factories around PTP, which will help to generate throughput volumes for the port), optimising its current footprint capacity, as well as embarking on digitalization and automation at its port.
     
  • For the construction segment, the group is working on replenishing its order book. YTD, the group has submitted around five tenders, with the aim of maintaining its target of RM5bil outstanding order book. The group will continue to focus on projects in the niche segments within its expertise such as marine, utilities and rail-related projects, which include the MRT3 (where it is actively pitching to the government to kick-start the project), the PGU-I gas pipeline replacement project and other EPC work packages.
     
• Our earnings upgrade is to reflect more resilient total container throughput volume growth assumptions of a 2% contraction in FY20F, followed by a 3% growth in FY21F (vs. a 7% contraction in FY20F and a 5% growth in FY21F projected previously).
• 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). We see value in MMC Corp with its port business valued at 9x forward P/E on a stand-alone basis.

Source: AmInvest Research - 26 Aug 2020