MMC’s 2017 core net profit of RM285m (-38% yoy) came in below our and consensus expectations, as it constituted only 83% of our forecast. The decline was due to lower construction profit, an absence of land sales in 2017 and significantly higher effective tax rate for the quarter. Excluding the impact of the tax hit, the PBT for 2017 is in line with our expectation, but still falls short of the consensus expectation. We are downgrading our call to HOLD (from Buy) with a lower TP of RM2.10 (from RM2.30).

Ports – The Only Segment That Delivered Growth

MMC’s port business is the only division within the group that generated positive PBT growth (+6% yoy) in 2017, driven by Johor Port and also the maiden earnings recognition of its associate, Penang Port. As competition intensifies post the forming of a new shipping alliance, Northport container volume contracted by 8%, which led to a 33% yoy decline in PBT, and its contribution has also fallen to 18% from 29% a year ago. However, we are still positive on the segment growth in 2018, as MMC will increase its stake in Penang Port to 100%, and Johor Port will also continue to benefit from the ongoing construction work in RAPID.

Engineering & Construction (E&C) – Slower Revenue Recognition

Revenue for the year contracted by 16% yoy, due to lower revenue recognition from the KVMRT-SBK line as it was completed in 2016, which led to the 14% yoy decline in PBT (excluding provisions) for the year. E&C contributed around 52% of group PBT in 2016, but this has dropped to 44% in 2017. Apart from the weaker performance from E&C, the lack of substantial land sales in 2017 also contributed to the decline in the group PBT. Nevertheless, we believe that the high effective tax rate for the year at 41% was the main contributing factor for the earnings miss.

Downgrade to HOLD, With a Lower TP of RM 2.10

We are lowering our 2018-19E EPS by 11.3-12.4%, to input a slower E&C contribution, a lower contribution from its associate and a higher effective tax rate. We are also downgrading our call to HOLD as we lower our TP to RM2.10, adjusting for the new fair value of its associates and also the current capital structure.

Source: Affin Hwang Research - 28 Feb 2018