Investment Highlights

• We maintain our forecasts but tweak our fair value (FV) up slightly to RM1.51 (from RM1.49 previously) to reflect the upgraded consensus FV for Gas Malaysia to RM3.11 (from RM2.96 previously). MMC owns a 30.9% stake in Gas Malaysia. Our sum-of parts valuation has been adjusted for a 3% discount to reflect a 2-star ESG rating as appraised by us (Exhibits 1 & 2). 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.

• Northport (Malaysia) Bhd (a 99.1%-owned unit of MMC) and Westports are acquiring a 50% stake each in Boustead Cruise Centre (BCC) from Boustead Holdings, free of liability and guarantee, for RM115mil cash each (or RM230mil in total). BCC owns and operates a cruise terminal sitting on some 69.8 acres of predominantly seafronting land in Port Klang, providing port facilities and services to cruise and navy vessels.

• We are mildly negative on the acquisition. We do not see much synergy between operations of a cargo port and a loss-making cruise ship terminal. BCC reported net losses of RM7.6mil, RM3.8mil and RM14.7mil during non-pandemic years in FY17–19 (Dec). Its net loss (unaudited) widened to RM54.5mil in FY20.

• Having said that, we take comfort that:

1. At RM230mil in its entirety, BCC is priced at a 23% discount to its adjusted unaudited net asset of RM299.6mil, based on an independent revaluation on 31 Dec 2020, valuing the land, buildings and jetty of BCC at RM289mil (vs. Boustead Holdings’ original acquisition cost of RM310mil in 2014). Specifically, the vacant land was valued in the independent revaluation at RM61 per sq ft, which is comparable to the going rate of RM50–75 per sq ft in the surrounding area; and

2. The land has potential for logistic services and port development.

• The acquisition will increase MMC’s already high net debt and gearing of RM9.3bil and 0.9x respectively as at 31 Dec 2020 to RM9.4bil and 0.91x. Assuming BCC’s net loss in FY21F is to match that of FY20, i.e. RM54.5mil, MMC’s half share of RM27.3mil shall erode our FY21F forecast by about 7%

• In spite of the less-than-encouraging acquisition, MMC remains appealing as a proxy to the port sector in the region (Malaysia included) that 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 13x forward P/E on a stand-alone basis.

Source: AmInvest Research - 22 Mar 2021