MMC reported relative lacklustre earnings for 1QFY17, as PATAMI of RM55mn (-79% QoQ, +7.4% YoY) constitute only 11% and 9% of consensus and our full year estimates respectively. However, we are expecting stronger growth in coming quarter arising from higher contribution of its construction and ports operation. We also downgraded our TP to RM2.80 (from RM2.90) as we lowered the value for Malakoff, but we are still maintaining our BUY call.

Ports – Disappointing Results Due to Higher Cost

The port business recorded a sharp decline in PBT to RM124mn (-3% YoY), which was attributed to weaker performance from Port of Tanjung Pelepas (PTP), as revenue declined by 4% YoY, but PBT dropped by higher 38% YoY. Management indicated that the volatility in fuel cost during the quarter had hampered its profitability. PTP was the main earnings contributor for its port operation, contributing 44% of its segment PBT in 1Q16, but only 30% of the segment PBT in 1Q17. Our full year estimate for the segment stands at RM479mn.

Engineering & Construction – Expecting More Works to Come

E&C PBT also declined by 9% YoY to RM25mn, mainly due to lower revenue recognition from the construction work related to the MRT project. We are of the view that that the revenue would pick up in coming quarters as the construction work starts to gain momentum for both the elevated and tunnelling job for the SSP line (Line 2). Our full year PBT estimate for the E&C segment is RM387mn.

Maintain BUY With a Lowered TP of RM2.80

We are lowering our EPS by 5.5% - 9.3% for FY17-FY19E, mainly due to the revision in our EPS forecast for Malakoff, which also resulted in a lower TP for the group. We are still keeping our BUY call on MMC, as we believe the earnings from the group core business (Ports and E&C) will pick up in the next few quarters. Certainly another a timely disposal of its landbank could also provide upside risk to our forecast.

Risks

Risk to our call include: i) further unscheduled outages at Malakoff’s power plant.; and ii) fewer than expected recognition of construction progress revenue

Source: Affin Hwang Research - 30 May 2017