Investment Highlights

• We increase our FY21–22F forecasts by 43% and 47% respectively, and tweak our fair value up slightly by 3% to RM1.54 (from RM1.50) based on sum-of-parts (SOP) valuation (Exhibit 3). This values MMC’s ports division at 16x FY21F EPS (a 30% discount to its peers' historical average to reflect its lower margins). Maintain BUY.

• MMC's FY20 core net profit of RM460mil (adjusted for disposal gains and impairment of receivables) blew away expectations, exceeding our forecast and consensus estimates by 77% and 60% respectively. We believe the key variance against our forecast came largely from: (1) a higher-than-expected container volume handled by Northport; (2) higher margins from the port segment (we believe, due to cost savings initiatives and better economy of scales at Pelabuhan Tanjung Pelepas (PTP) on improved utilisation); and (3) lumpy earnings from the engineering segment (we believe, mainly due to account finalization of the MRT2’s underground works).

• MMC’s FY20 core net profit more than doubled thanks to higher volume handled at PTP, higher contribution from the MRT2 on account finalisation, sale of land at Senai Airport City (SAC), and lower operating expenses and finance costs. However, these were partly offset by the lower volume handled at Penang Port and lower passenger and cargo volumes at Senai Airport.

• MMC will continue to invest in its ports infrastructure and focus on resource optimisation to improve operational and cost efficiencies. On the construction side, the group will continue to bid for new jobs while focusing on the execution and timely completion of its existing projects.

• 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 10x forward P/E on a stand-alone basis.

Source: AmInvest Research - 1 Mar 2021