• We maintain our forecasts and fair value (FV) of RM1.50 for MMC Corporation (MMC) based on sum-of-parts (SOP) valuation (Exhibit 1). 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.

• The Inland Revenue Board of Malaysia (IRB) has raised an additional tax assessment of RM39.3mil on Johor Port (a wholly-owned subsidiary of MMC) for the years 2016 to 2018, as it viewed that Johor Port had made income tax exemption claims exceeding the allowable amount.

• Johor Port will contest and appeal against the notice of additional assessment. In the worst case, assuming that Johor Port is unsuccessful and is liable to pay the full amount, this will erode MMC's FY21F earnings by 14% but only shave its NTA by 1 sen from RM3.08 as at 30 September 2020 to RM3.07.

• We are not overly perturbed by the latest development, which is likely to turn into a long-drawn legal process that drags on for years (without any actual impact on the bottom line).

• Meanwhile, 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 - 15 Feb 2021