Investment Highlights

• We maintain our forecasts but tweak our fair value up slightly to RM1.56 (from RM1.52 previously) for MMC based on sum-of-parts (SOP) valuation (Exhibit 1), as we adjust the fair value for Gas Malaysia upwards in our SOP, according to the consensus fair value of RM3.06 (from RM2.72 previously). This values its seaport division at 16x FY21F EPS (a 30% discount to its peers' historical average to reflect its lower margins). Maintain BUY.

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

1. Ports segment: MMC reiterated its bullish stance for the outlook for its ports in FY21, underpinned by its continued investment in port infrastructure to capture more volume as global trade activities recover from the pandemic. We are projecting a 3% growth YoY for MMC's total container throughput volume in FY21F.

For 9MFY20, MMC's total container throughput was flattish YoY, vs. our full-year FY20F forecast of a 2% contraction conservatively (as we believe there was a one-off spike in volume in 3QFY20). MMC has been actively enticing shipping liners to reposition their empty containers (from Southeast Asia to China) at its ports by giving rebates.

We believe PTP (historically contributes ~65% of MMC's total container throughput volume) is still on track to achieve its target of a 5% container throughput volume growth in FY20F. For 9MFY20, it already achieved 4%.

2. Engineering segment: As of September 2020, MMC's outstanding order book (Exhibit 2) declined to RM3.9bil from RM6.62bil in the beginning of the year. We believe there is a mild urgency for MMC to replenish its order book.

MMC guided for a tender book worth ~RM3.5bil and it is confident to win at least one or two. For the MRT3 project, MMC has submitted its proposal and has held a preliminary discussion with the government.

3. Penang Port: Penang Port's container throughput volume has seen recovery from its low in April during the movement control order (MCO) period. Moving forward, MMC is confident that Penang Port can achieve ~1.5mil TEUs in FY21F (back to pre-Covid level), underpinned by: (1) the booming paper recycling industry in Penang (which will contribute to about 100K TEUs during its peak season); (2) the recovery of Southern Thailand's containers, further enhanced by the newly launched operations of Bang Klam Inland Container Depot (ICD) in South Thailand (commenced in early October 2020), which is estimated to be able to bring in additional 5.8K TEUs annually; (3) upcoming free commercial zone (FCZ) status (expecting approval to be completed by 4QFY20), with a land size area of ~83.57 ha, that will allow Penang Port to tap into secondary market (such as transhipment containers between the Bay of Bengal and the Far-East; and (4) the growing foreign direct investments in Penang and northern Kedah. The capex for Penang Port is budgeted to be around RM155mil.

4. Johor Port: Johor Port is a multipurpose port (focusing on gateway cargoes) with a captive market of the diversified hinterland industries in Johor. In FY20 (YTD), Johor Port has seen volume contraction mainly from clinker and petroleum, partly cushioned by volume growth from essential products/commodities such as food & plantation related items. Johor Port is expanding to the growing marine services market within the Pasir Gudang water limit (underpinned by the increase in vessel calls at Pengerang Terminals). It also has a 25-year concession with Petronas to provide operations and maintenance to its Refinery and Petrolchemical integrated Development (RAPID) Solid Product Terminal. Johor Port has a planned capex of ~RM180mil in the pipeline.

• The port sector in the region (Malaysia included) has come out from the pandemic relatively unscathed. Over the long term, its outlook 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 - 30 Nov 2020