Investment Highlights

• We maintained our forecasts and fair value of RM1.56 for MMC Corporation (MMC) 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 a visit to MMC’s biggest port, namely, Pelabuhan Tanjung Pelepas (PTP) feeling positive. To recap, PTP contributes ~65% of MMC’s total container throughput volume. The key takeaways from the visit are as follows:

1. YTD, PTP’s YoY container throughput growth is already in the green and is on track to meet its target of 9.6mil TEUs for FY20F (which translate to 5% growth YoY). PTP believes the growth has been driven largely by shipping lines consolidating their containers at the port as the alliances they belong to reorganise their routes amidst the pandemic. This has also translated to higher demand for container storage. In addition, of late, there has been traffic driven by activities to replenish stocks depleted during the global lockdown.
   
   The traffic is likely to be driven by the movement of goods ahead of the Christmas shopping season in 2HFY20F, and beyond this, the recovery and normalisation of the global trade.
    
2. PTP will continue to optimise its capacity. It will increase its capacity to 15.3mil TEUs (from 12mil TEUs currently) by modernisation of its equipment fleet, specifically the quay cranes and subsequently adding terminal tractors and RTGs and supporting infrastructures.
   
   The port recently took delivery of four ultra large container vessels (ULCV) ship to shore (STS) quay cranes (Exhibit 8), with the remaining four units expected to arrive in 3QFY20F. This will bring the total to 66 STS cranes of which 24 are Triple-E compliant (economy of scale, energy efficiency and environmentally improved). This will allow the port to serve ULCV with a capacity of more than 23,000 TEUs. The investment in the ULCV STS quay cranes is among the initiatives taken to improve efficiency by boosting container handling capacity, capability and reliability.
    
3. PTP has embarked on its IR4.0 transformation with the key focus on autonomous prime mover, terminal operating system, productivity application and terminal network. In collaboration with Dutch terminal truck specialist Terberg, PTP plans to use autonomous trucks in the port area in future. Also, sensors and big data will be introduced in the maintenance of infrastructure that shall result in cost savings.
   
   In addition, a “productivity app” will be used by its truck drivers to track their activities and performances to enable a more incentive-based reward system. PTP is also looking at minimizing the transport route at the port area for higher efficiencies with the help of technology. The port operator has only recently announced going live of the first phase of its integrated enterprise resources planning system, which will transform and streamline the company’s core back-end operations.
    
4. PTP will add another 100 acres (the Tanjung Adang development) with an estimated investment of RM140mil to its existing free zone as the current free zone land is already 95% taken up. It should attract multi-national companies (especially those currently headquartered in Singapore) to put up their production facilities/warehouses there (which will also translate to gateway cargoes for the port).

• During the visit, we had our first look at the port’s berth measuring 5km (Phases 1 and 2 as shown in Exhibit 7) and the yard (located next to the berth) with a storage capacity of 223,890 TEUs. Dredging work was ongoing (Exhibit 9) to deepen its draught to 18.5 metres (from 18.0 metres currently), which will allow ULCVs to call the port without any tide restrictions. At present, the port is able to support the world’s largest vessel with a capacity of up to 24,000 TEUs. However, this will only be achieved at limited available windows.
• 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 - 25 Sept 2020