• We maintain our forecasts but tweak our fair value (FV) down slightly to RM1.50 (from RM1.56 previously) for MMC Corp based on sum-of-parts (SOP) valuation (Exhibit 1). This is to reflect the recent downgrade in our FV for Malakoff (to RM1.00 from RM1.10 previously). We continue to value MMC’s seaport division at 16x FY21F EPS (a 30% discount to its peers' historical average to reflect its lower margins). Maintain BUY.

• MMC is paring down its stake in Red Sea Gateway Terminal Co Ltd (RSGT) from 20% to 12% in a rather complicated deal. The 8% stake is being sold for SAR211.1mil (RM227.6mil) while post-exercise, the remaining 12% will be held indirectly via a 20%- owned associate that in turn will hold a 60% stake in RSGT (vs. an effective direct ownership before the exercise).

• RSGT is an independent container terminal operator at Jeddah Islamic Port (commenced operation since 2009), with an annual container throughput capacity of 5.2mil TEUs. In December 2019, RSGT signed a new 30-year concession agreement with Saudi Ports Authority, which envisages the continuous investment of US$1.7bil in automation, infrastructure and equipment, to achieve a projected annual throughput capacity of approximately 9mil TEUs within the concession period.

• We are mildly positive on the latest development as the RM227.6mil disposal proceeds will improve MMC’s net debt and gearing of RM8.79bil and 0.94x respectively as at 30 Sept 2020 to RM8.57bil and 0.91x respectively. We understand that the disposal will result in a gain but the quantum is not disclosed.

• The impact of the partial stake disposal to MMC’s operating profits is immaterial. For 9MFY20, RSGT contributed <5% of the total group's core net profit (postexercise, MMC will only equity account for 12% of RSGT’s earnings vs. 20% before the exercise).

• 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 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 with its port business valued at 10x forward P/E on a stand-alone basis.

Source: AmInvest Research - 2 Feb 2021