We noticed that MMC is gaining interests recently due to the group’s 2Q14 earnings recovery driven by Malakoff’s Tanjung Bin power plant recovery and KVMRT1 construction progress. More importantly, with Malakoff’s earnings recovery, we believe the probability of its listing of Malakoff has increased. One of the push factors is that Malakoff’s Junior Sukuk of RM1.8b with 6.3% interest rate due by September 2015; if it is not redeemed, it will result in higher interest costs. On that basis, the listing should ideally take place before Sep-2015. If this is really the case, it will be a major re-rating for the stock. Elsewhere, we have also seen MMC’s other key divisions (i.e. construction and ports) gaining momentum thanks to the KVMRT1 progress and growing ports activities in PTP. However, we decided to maintain our MARKET PERFORM call on MMC with a revised Target Price of RM2.81 (RM2.77 previously). We are cautious over the potential delay in the 1000 MW Tg Bin extension (published in The Edge Weekly on 6th September 2014) which may affect the stock’s sentiment in the near term. Even though it might not impact too much on Malakoff’s DCF valuation (-5 sen reduced to our SOP if delay 6-12 months), we prefer to remain conservative here as we would prefer that there is more clarity on the issue to avoid impact on investors sentiment.

Malakoff’s earnings finally back to normal... Malakoff’s operations are now back to normal given that the 2100 MW Tanjung Bin power plant’s issues such as major maintenance and forced outages had already been fully addressed. This is after seeing the group’s E&C division’s PBT went up 216% QoQ. Malakoff contributed more than 90% of the division’s PBT. As the Tg Bin plant has recovered and finally achieved almost 90% availability factor in 2Q14, MMC is now receiving full capacity payment for the plant.

… could prompt MMC to list Malakoff. The improved financial performance of Malakoff does increase the probability of listing. We reckon the bigger push factor is due to the Junior Sukuk of RM1.8b which is due in September 2015 (6.3% interest rate). If Malakoff does not redeem the Sukuk, it has to pay higher interests to the bondholders. Recall, we have consistently mentioned in our MMC’s report since two years ago that we believe the IPO will be a major re-rating catalyst for the stock. Postlisting, we expect the group’s gearing level to improve significantly to 0.7x from currently 2.1x. Also, post-listing, we expect: (i) MMC’s earnings to improve via reduction in interest expenses given that almost all the IPO proceeds will be utilized to pare down the group’s heavy debt, and (ii) investors to appreciate more the group’s growing construction and ports divisions.

1000MW Tg Bin extension delay? The Edge Weekly on 6th September 2014 reported by quoting TNB’s officials that Malakoff’s 1,000 MW Tg Bin’s extension project will be delayed more than 6 months due to construction problems. The article added that there is potential RM110m of LAD will be imposed to Malakoff for the delay of the plant’s construction. Until we gather more clarity on this issue, the situation is opaque and presents earnings distortion risks to Malakoff’s future earnings. Even though it might not impact too much on Malakoff’s DCF valuation (-5 sen reduced to our SOP if delay 6-12 months), we are waiting for more clarity on the issue to avoid impact on investors sentiment especially if MMC really to list Malakoff in the nearterm.

Construction and ports gain momentum. KVMRT1 project under MMC-GAMUDA’s tunnelling and PDP are currently at active phase of completion stage (63% and 35% respectively); this has significantly boosted MMC’s bottomline. Meanwhile, MMC’s 70%-owned PTP, the nation’s largest port, has recently completed its construction of two new berths which increased its TEU’s capacity to 10.5m from 8.5m. (Refer overleaf).

Raising earnings forecasts due to Malakoff recovery. We previously underestimated Malakoff’s earnings following the previous major maintenance and the forced outages in Tg Bin power plant. As Tanjung Bin is back to normal and earlier than our expectation, we raise our FY14 net profit forecast by +46% but maintain our FY15 forecasts.

Maintain MARKET PERFORM with slight revision in TP to RM2.81 from RM2.77 previously. Slight revision in our TP was after we revised higher Malakoff’s earnings in Tg Bin power plant and on housekeeping. While we like MMC due to: (i) potential Malakoff listing in 2Q15 which will clean up the group’s balance sheet, (ii) growing earnings in its ports and construction divisions, and (iii) recovery of core earnings in Malakoff, we prefer to get some clarity regarding the issue of Tanjung Bin’s extension delays.

Source: Kenanga