Period  4Q13/FY13

Actual vs. Expectations MMC’s FY13 core net earnings of RM39m came in below expectations, accounting for only 13% and 15% of our and consensus estimates, respectively.

 The huge negative variance was mainly due to: (i) lowerthan-expected contribution from Malakoff which was affected by boiler tube leaks, de-rating of plants and major maintenance works, and (ii) bigger losses in its “others” division in 4Q13.

Dividends  No dividend was declared.

Key Results Highlights QoQ, 4Q13 net profit declined by 70% due to operating loss of RM88m in Energy and Utilities (E&U) division. Losses in the division were mainly due to lower coal price coupled with lower capacity income at Tanjung Bin power plant due to boiler tube leaks and the de-rating of its plants.

 YoY, MMC registered FY13 core net profit of RM39m from losses of RM89m in FY12. The net loss of RM89m in FY12 was after excluding a one-off gain of the deconsolidation of Gas Malaysia. Theoretically, the E&U division would have reported a pre-tax profit of RM200m in FY13 if the operational issues (i.e. boiler tube leaks, major maintenance) did not occur. On a positive note, its construction division’s FY13 pre-tax profits jumped by 120% thanks to healthy progress of the MRT1 project.

Outlook  Due to the unexpected boiler tube leaks in the Tanjung Bin power plant, we believe the listing of Malakoff might be postponed to next year from its planned timetable in this year.

 M&A activities in the pipeline? We gather that MMC has continued to negotiate with few parties, including the government to acquire strategic assets. It is also widely speculated that MMC is still in negotiation with the government to acquire KTMB. In addition, MMC is also looking to spin off its transport logistics division, namely PTP and Johor Port.

Change to Forecasts While we are maintaining our FY15 earnings, we slash MMC’s FY14 earnings by 53% as we take a conservative view that the boiler tube leaks might hurt its earnings for at least for the next two quarters.

Rating Downgrade to MARKET PERFORM

 We are now downgrading the stock to MARKET PERFORM from OUTPERFORM previously. There are higher possibilities that Malakoff’s IPO will be further postponed to next year due to some operational issues in its Tanjung Bin power plant.

Valuation  We revised lower our Target Price to RM2.80 from RM3.60 previously based on SoP valuation. This is after we widened our discount to RNAV to 30% from 10% previously. The higher discount is mainly due to the higher operational risk following the Tanjung Bin’s boiler tube leaks incident which could lead to the postponement of Malakoff listing.

Risks to Our Call No delay in Malakoff listing

Source: Kenanga