Period  1Q14

Actual vs. Expectations 1Q14 net profit of RM23.6m came in below expectations, accounting for only 11% and 7.4% of our full-year forecast and consensus estimates. The negative variance was mainly due to weaker-than expected performance of E&U division aggravated mainly by lower contribution from Malakoff’s Tg Bin power plant as a result of forced outages caused by boiler tube leaks.

Dividends  As expected, no dividend was declared in 1Q14.

Key Results Highlights QoQ, core net profit recovered to RM23.6m from a net loss of RM115.7m (excluding one off tax credit) in 4Q13. Operationally, 1Q14 was slightly better than 4Q13 as its EBIT up 4% to RM739m. This was mainly attributed by higher revenue following higher dispatch factors from Malakoff’s gas fired power plants and contribution from Malakoff Wind Macarthur (acquired in June 2013).

 YoY, 1Q14 net profit jumped by 167% due to low base effect. 1Q13 was one of the weakest quarters in MMC’s history where it was badly hit by the major maintenance works at the Tanjung Bin power plant.

 Despite recovery in core earnings QoQ and YoY, MMC could have reported higher net profit in 1Q14 if there were no forced outages caused by the boiler tube leaks in Tg Bin power plant. E&U’s PBT margin was only 5% in 4Q13 as compared to its normal margins of 10-15%.

Outlook  The momentum of MMC’s construction division has picked up this year. Year-to-date, MMC has secured approximately RM600m worth of contract. Latest project secured on 12th May 2014 was the civil works of co-generation plant worth RM300m. We estimate by now, MMC’s total outstanding orderbook now is RM3.3b which will last until 2016-2017.

 Nevertheless, the Malakoff listing still remains the key catalyst for MMC. With the listing of Malakoff, MMC could reduce its debt substantially. Post-listing of Malakoff, MMC could focus more on its construction division, which has a bright outlook especially with KVMRT2.

Change to Forecasts We cut our FY14E earnings by 9.9% to reflect the unexpected forced outages. Nonetheless, we maintain our FY15E forecasts for now

Rating Maintain MARKET PERFORM The stock’s key catalyst still lies in Malakoff listing which is postponed to likely next year. With limited upside, we reiterate our MARKET PERFORM rating.

Valuation  Post the earnings revision, our Target Price is tweaked to RM2.77 (from RM2.80) based on SoP-based valuation.

Risks to Our Call  No delay in Malakoff listing.

Source: Kenanga