Decent core but weak associate

Although MMC’s 9M16 core net profit (ex-discontinued operation) is up by more than 141%, it is still lagging behind our expectation, due to the relatively weak set of results from its associate, Malakoff (MLK MK). However, we are not changing our HOLD call on the stock, as we believe MMC can still catch up in 4Q, as its core operations (port and engineering & construction) continue to deliver QoQ growth.

9M16 – Associate ruined the comeback

9M16 net profit is only 67% of our full year forecast, despite both its core operation, ports and engineering & construction, delivered 34% PBT growth YoY. The drag is mainly from its associate stake, Malakoff, which was impacted by higher depreciation charge and tax rate during the quarter. If we normalise the impact to the associate earnings, the net profit for 9M16 is 77% of our full year forecast.

Ports – Small hiccups but still deliver good growth

The port segment has benefited from the consolidation of Northport, which is the main driver for the 30% PBT YoY growth in 9M16. For its two existing ports, Johor Port manage to deliver 1% YoY profit growth, while Port of Tanjung Pelepas (PTP) suffer 8.9% decline in profit YoY. The decline in PTP earnings was due to oil spillage issue at the port in 3Q.

Engineering & construction – Everything seems to be right

PBT for the segment is up by 33% YoY for 9M16, which was supported by on-going construction work on its existing projects, COGEN at Pengerang and Langat Centralized Sewerage Plant. The earnings were further boosted by write back on previous provision and also gain on land disposal. Earnings momentum is expected to continue when underground work package for MRT Line 2 (worth ~RM15.7bn) starts in 2016/17.

Maintain HOLD due to lack of short-term catalyst

We maintain our HOLD call on MMC with an unchanged RNAV-based 12- month target price of RM2.35. We still like MMC’s good long term earnings visibility due to the MRT2 underground works package and Project Delivery Partner (PDP) role for the MRT2 above-ground works (RM15bn) and Sabah portion of the Pan Borneo highway (MMC has 20% effective stake in Sabah PDP consortium). Winning new construction or concession contracts will be positive for MMC but are opportunistic in nature.

Key risks

Risks to our call include: i) unscheduled outages at Malakoff’s power plants; and ii) fewer-than-expected awards of new construction projects.

Source: Affin Hwang Research - 24 Nov 2016