MMC; Buy; RM2.50
Price Target: RM4.95; MMC MK

MMC’s 2Q13 results are due tonight. We expect a weak set of numbers mainly dragged down by poorerthan-expected results for Malakoff. We understand the unscheduled maintenance at Tanjung Bin has resulted in lower capacity payments from Tenaga which was reduced by RM200m q-o-q. This is reflected in Malakoff’s average availability factor of 83% in 2Q13 vs 91% in 2Q12 and is also one of the reasons for the postponement of Malakoff’s listing to 2Q14. Operationally, its other divisions should fare well with some pick up in dry bulk and break bulk for Johor Port and strong passenger arrivals for Senai Airport.

The expected weak set of numbers does not derail our core investment thesis for the stock. We continue to like MMC as deep asset play with exposure to two core themes in Malaysia – Iskandar (60% of SOP) and Infrastructure. At yesterday’s ETP mid-year briefing, we understand the government is still committed to rolling out high multiplier and low import content projects. We think MRT Lines 2 and 3 falls into this category although the system packages and rolling stock will be sourced abroad at a later stage. We also understand MRT Line 1 is progressing well on track with no major issues and is already 24% completed (35% underground and 16% above ground) where due credit has to be given to the PDP, MMC-Gamuda JV. Hence, based on expertise and track record alone, we expect continuity for the MRT Line 2 PDP role for the MMC-Gamuda JV. Two key catalysts to watch out for are :- i) Announcement of PDP role for MRT Line 2 by year end and ii) Inking of 3 new land deals for tank farm operators and a new benchmark price of RM40 psf.

The stock has fallen by 9% YTD and trades at a 60% discount to its SOP Value. MMC’s strategy to narrow the deep discount to its SOP is to unlock value via listing of its subsidiaries. This has started with Gas Malaysia to be followed by Malakoff in 2Q14 and Johor Port. Based on our estimates, the market is only assigning RM600m residual value for its unlisted businesses of two ports (PTP and Johor Port), construction franchise with RM4bn orderbook, water concession via Aliran Ihsan, 4,556 acres of land bank in Johor. This is clearly not justified given that at a fire sale price of RM10psf, the land should be worth RM2bn. We maintain our BUY rating and TP of RM4.95 based on a 20% discount to SOP.

Source: HwangDBS Research - 30 Aug 2013