News  MMC announced last week that MMC-Sumitomo Consortium has secured the RM1.51b Centralised Sewage Plant project. The project also involves the construction of sewer network connection in the Langat River Basin Catchment which is expected to complete in six years.

Comments  Neutral to slightly positive on the announcement. Assuming MMC owns the minimum majority stake of 51% in the consortium, the group would at least replenish RM767.6m worth of orderbook. Hence, with the assumption of 7% PBT margins, the project could only contribute, on average about RM6.7m to the group’s net profit per annum until 2020. That is only 2% of our FY15 net profit forecast of RM361.5m.

 Including this contract, year-to-date, we estimate MMC has secured about RM1.4b worth of projects, exceeding our FY14 new orderbook forecast of RM1.0b. So far for this year, MMC has secured 3 major government-related projects. In total, we estimate that MMC’s current outstanding orderbook stands at RM3.4b which will last until 2020. Big chunck of its orderbook is still from the KVMRT1 tunnelling project.

Outlook  While MMC’s outlook should remain bright driven by: (i) potential Malakoff listing in 2Q15 which will clean up the group’s balance sheet, (ii) growing construction and port divisions’ earnings, and (iii) recovery of core earnings in Malakoff, nonetheless, we are still waiting for more clarity on the recent issue of Malakoff’s Tanjung Bin extension delays. We believe that this issue, if not resolved may cause negative sentiment amongst investors on Malakoff if the latter really proceed with an IPO in 2Q15. It may also potentially distort Malakoff’s earnings going forward.

Forecast  Relatively unchanged as the project’s duration is longer than our duration forecast for new orders of about 3-4 years.

Rating Maintain MARKET PERFORM

 We prefer to get some clarity regarding the issue of Tanjung Bin extension delays despite the group’s earnings recovery.

Valuation  Target price maintained at RM2.81 based on unchanged SoP-based valuation. Our TP of RM2.81 implies 23.7x FY15 Fwd-PER, in tandem with its 5-year average Fwd-PER of about 25.0x.

Risks to Our Call   Favourable outcome from the Tg Bin’s extension delay issue.

No delay in Malakoff listing.

Source: Kenanga