MMC Corp; Buy; RM2.60
Price Target: RM4.95; MMC MK

The Edge Financial Daily reported that a JV between MMC and Mudajaya is frontrunner for certain stretches of a spine road project from Kota Baru in Kelantan to Simpang Pelangi in Bentong, Pahang. The project, estimated to be valued at RM8bn, is 465.3km in length. The project is not entirely new as it was featured in the 9MP. It is divided into several packages and scope of works includes the building of new roads and upgrading of the existing two-lane road into a four-lane motorway. Once completed it is supposed to reduce the travel time from Kuala Lumpur to Kota Baru by half while also improving accessibility to remote areas in Kelantan and Pahang.

The tender for the first stretch (Kota Baru-Kuala Krai) is estimated to be RM1.2bn-RM1.6bn and will be the only portion which will be tolled. According to the daily, the MMC-Mudajaya JV has proposed to undertake this stretch on a BOT basis where revenue earned will be channeled to finance the next phase linking Kuala Krai to Karak.

This piece of news validates one of our anchor themes for the stock which is stronger recognition as an infrastructure proxy while also diversifying its partnership outside of Gamuda. Assuming a contract value of RM1.4bn for the first stretch and a 50% stake in the JV, this works out to be RM700m per contractor. There is also upside from toll revenue collection in the future given it is a BOT project. We have assumed RM1bn of new contract wins in FY14F where we think MMC is frontrunner for the RM1.5bn Langat 2 water treatment plant together with its JV partners. We expect the MMC-Gamuda JV to be PDP and tunneling contractor for MRT Line 2.

We reiterate our BUY rating on MMC and TP of RM4.95/share, based on a 20% discount to our SOP value of RM6.20. Infrastructure accounts for 32% of our SOP value.

Source: HwangDBS Research - 11 Oct 2013