MMC’s 9M17 core net profit at RM200m (-8.4% yoy) is still lagging behind estimates, as it constitutes 60% and 59% of both our and street’s FY17 forecast respectively. Net profit for the year is expected to decline, as last year’s earnings were bolstered by the disposal of several lands. We believe that MMC has actually delivered a decent set of earnings for the quarter, as profit is up by 41% qoq if not for the impairment of its JV. We are upgrading our call to BUY, despite lowering our TP to RM2.30, as we believe the recent sell-down has been overdone.

Ports – Back on Track for Growth

MMC has managed to turn around the profitability of its ports and reverse the LBT over the past 2 quarters to a modest PBT growth of 4% yoy for 9MFY17. The improvement can be attributed to better performance of Port of Tanjung Pelepas and Johor Port. Container throughout volume at Port of Tanjung Pelepas has recovered to +1% yoy in 9M17 from the -4% yoy in 1H17. Johor Port has benefited from higher port activities for the loading of machinery as the construction activities at RAPID gathers momentum.

Engineering & construction (E&C) – Profit diluted by impairment

Although revenue for the segment grew by 2% yoy for 9MFY17, PBT declined by close to 57% yoy, due to an impairment charge of RM98m and the absence of gains on disposals of land. The impairment was for its SMART toll-road concession due to the reduced traffic volume forecast. SMART is equally owned by MMC and Gamuda. Due to the new financing requirement for the PDP role in securing MRT 3, the MMC Gamuda JV is unlikely to regain the role, but is still keen to be the contractor for the underground (tunnelling) job. While there is no near-term impact on our EPS estimates, we have reduced the overall fair value of the JV to reflect the lower profitability.

Upgrade to BUY on Valuation

We are not lowering our EPS forecast, as we believe that the strong recovery in EPS qoq shown in 3Q17 can sustain into 4Q17. However, we are downgrading our TP to RM2.30, as we lower the fair value for the MMC Gamuda JV, its associate Gas Malaysia and also the land value for the Senai Airport City. Despite our lowered TP, we are upgrading our call to BUY from HOLD, due to its undemanding valuation at 13.5x FY18E PER.

Source: Affin Hwang Research - 23 Nov 2017