Investment Highlights

• We maintain our forecasts but tweak our fair value (FV) down slightly by 3% to RM1.49 (from RM1.54) based on “sum of parts” (SOP), adjusting for a 3% discount to reflect a 2-star ESG rating as appraised by us (Exhibits 1, 2 & 5). The FV values MMC’s ports division at 16x FY21F earnings (a 30% discount to its peers' historical average to reflect its lower margins). Maintain BUY.

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

1. Outlook for ports: MMC highlighted that the sector’s outlook remains positive in FY21F as economies reopen. Already, PTP registered a record container volume handled of 9.85mil TEUs in FY20, translating to an 8% growth YoY. It also expects stronger container volume recovery at Penang Port underpinned by the return of containers’ volume from southern Thailand following the reopening of borders for cargoes, coupled with its recently awarded free commercial zone status (which enables it to tap into the transshipment market).
    
2. Northport: Similarly, it recorded the highest monthly volume of 310.5K TEUs handled in December 2020, backed by the return of major shipping lines such as ONE, Evergreen, MSC amid port congestion experienced at Westports and Port of Singapore (PSA). This brought its total container volume handled to 2.7mil TEUs in FY20, translating to a 0.6% increase YoY. For the year, it has received 108 ad-hoc calls and observed nine diversion of services from Westports, as well as nine new services calling at the port.
    
3. MMC shared more information on Aliran Ihsan Resources (AIRB) (which makes up about 5% of our SOP valuation). The integrated solution service provider in water and wastewater development has about three decades of experience in water supply services industry in Malaysia.

Some of its current projects include: (i) operation and maintenance (O&M) of two water treatment plants (WTPs) in Gunung Semanggol and Taiping; (ii) six industrial wastewater reclamation plants using membrane technology; and (iii) non-revenue water (NRW) reduction projects for sister companies Johor Port, Northport, Penang Port and Senai Airport, etc. Over the years, it has been shifting its focus from the traditional municipal businesses to higher growth segments such as water reclamation and NRW projects to boost margins.

• 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 - 2 Mar 2021