MMC reported a lacklustre set of earnings for 1H17, as PATAMI of RM118m (-33% yoy) was below expectations. 1H17 results constituted 22% of our and consensus full year forecast. Although MMC did managed to deliver a 14% qoq growth in 2Q, it is still tracking below our expectation, due to flattish performance from it port operations, weaker revenue recognition from its construction business and a higher effective tax rate for the group. We downgrade our call to HOLD as we lower our TP to RM2.60.

Port – Higher Cost Continue to be a Drag

Volatility in fuel cost continues to hamper MMC’s port operations, as revenue grew by 4.4% yoy for 1H17, but PBT contracted by more than 2% yoy. Apart from Port of Tanjung Pelapas (PTP), which recorded a flat revenue growth, all the other ports in MMC’s portfolio managed to deliver a decent revenue growth for 1H. However, due to the lacklustre performance in the 1H17, we have lowered our estimates for the segment by 4%.

Engineering & construction (E&C) – Progressing not fast enough

Despite gaining better earnings momentum in 2Q for E&C, its progress is still tracking behind our schedule. As a result, we lower the estimates by more than 30% for the segment. Although we are of the view that revenue would pick up in the coming quarters, as construction work starts to gain momentum, the progress for the 1H17 is tracking too far behind our expectation which leads to the significant earnings revision. 2Q PBT for the segment is up 2.4x qoq, but is down by 25% yoy to RM60m (1HFY17 RM85m vs 1HFY16 RM110m).

Downgrade to HOLD With a Lowered TP at RM2.60

While core operations have disappointed us at the PBT level, the overall PATAMI was also negatively impacted by a higher effective tax rate, which led us to lower our EPS forecast for FY17E-19E substantially by 18%-38%. We have downgraded our call to HOLD on the back of lower TP at RM2.60.

Source: Affin Hwang Research - 29 Aug 2017