Some Uncertainty Ahead

MMC’s 1Q18 core net profit of RM41.3m (-25% yoy) came in below both our and consensus expectations, as it constituted only 11% of our respective forecasts. The decline was due to the poor performance of its Ports & Logistics segment, as PBT fell by 46% yoy to RM67m. While its Engineering PBT more than doubled to RM74m, that was insufficient to negate the weaker Ports & Logistics segment. As such, we have lowered our 2018-20 EPS forecasts by 18%-24%, and our 12-month TP to RM1.50. We maintain our HOLD call.

Ports & Logistics – Sharp Decline Was Unexpected

Although revenue for the segment was down only 8% yoy, its PBT declined by 46% yoy in 1Q18. The decline was due to poor performance from Johor Port and Northport, both suffering from lower activities. Container volume at Northport continued to decline post the forming of the new shipping alliance. While Port of Tanjung Pelepas has benefited from the alliance, the gain is not sufficient to compensate for the revenue loss at Northport. We have lowered our earnings contribution forecasts for Northport.

Engineering & Construction (E&C) – Uncertainty in the Future

PBT from this segment increased by 184% yoy due to higher progress recognition for the KVMRT line 2. Although we anticipate stronger contribution in the coming quarters, the future might not be as rosy, as the new government is re-looking at the feasibility of nationwide mega projects with the possibility of cancelling them. MRT 3 and the Pan Borneo Highway jobs are some of the projects that are being reviewed, in which MMC has a role.

Lowering TP to RM1.50, While Maintaining HOLD

Apart from lowering the value of its ports operation on the back of the earnings forecast revisions, we have also lowered the valuation of its E&C segment, which is the main reason behind the cut in our RNAV-based TP to RM1.50, as we relook at the fair value of each business segment (see Fig. 2). A re-rating catalyst for the stock would be the potential listing of its ports operation, although the recent weak set of results could further delay this prospect. Maintain HOLD.

Source: Affin Hwang Research - 29 May 2018