Period  3Q14/9M14

Actual vs. Expectations MMC’s 9M14 core net profit of RM149.2m came in within our expectation but below consensus at 70% and 57% of estimates, respectively. Our core net profit was derived after we exclude one-off items namely: (i)positive tax adjustments derived largely from investment tax allowance in PTP, (ii) disposal loss of RM10m from completed land sale nearby Senai Airport (booked in 2Q14), and (iii) fair value gain of RM28.6m (MMC’s level) arising from revaluation of Port Dickson Power (PDP) booked in 2Q14.

Dividends  None as expected.

Key Results Highlights

 QoQ, 3Q14 core net profit grew by 25%. Their wholly owned subsidiaries outshined their non-wholly own ones such as 51%-owned Malakoff. Thus, MI was reduced by 34%. We believe it is because of its 51%- owned Malakoff as the group reported that there were higher losses incurred in 3Q14 from Kapar Energy Ventures Sdn Bhd, impacted by transformer failures, which drag down the full recovery impact of Tg Bin Power Plant. Meanwhile, their transport and logistics division saw much higher contribution (PBT: +16%) driven by PTP and Johor port.

 Overall, 3Q14 net profit declined 48% YoY and 20% YTD due to high-base effect as the group had booked tax credit of RM42m in 3Q13. Nonetheless, the group’s PBT rose 14% YoY and 58% YTD, driven by: (i) better performance of Malakoff due to full recovery of Tg Bin, and (ii) higher construction profits from MRT1.

Outlook  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 in Malakoff if the latter really proceed with an IPO in 2Q15. It may also potentially distort Malakoff’s earnings going forward.

 Elsewhere, in last two days, The Edge Financial Daily, quoting unnamed sources reported that MMC is buying MISC’s 16% stake in NCB Holdings (UNDERPERFORM; TP: RM1.83). We were surprised with the news as MMC has never indicated that they intend to acquire any port assets, especially at only investment stake level. The news also added that NCB might be used as a listed vehicle for the backdoor listing of Tan Sri Syed’s Mokhtar (owns roughly about 52% stake in MMC through Seaport Terminal) port businesses. A back-door listing will be welcomed as the group can unlock its lucrative port businesses. However, we would prefer to see the listing of Malakoff first before any other acquisitions given that its nearmedium term direction of paring down its huge debts (i.e. 210% of debt-to-equity ratio) via Malakoff listing next year.

Forecasts Unchanged.

Rating Maintain MARKET PERFORM

 MMC’s share price has fallen by 16% since we downgrade the stock to MARKET PERFORM in February 2014. In fact, there was massive selling pressure in the last two days after The Edge reported MMC buying MISC’s stake in NCB Holdings. On 25th November 2014 where the selldown took place by as high as 8.2% to intraday low of RM2.24 (before rebounded back to closing price of RM2.38), the selling levels were extremely heavy with 60m shares transacted vs the 3-month average daily volume of only 3m. Despite the group’s earnings delivery, uncertainties persist on the group’s direction on the back of the recent newsflow which the market has perceived negatively. We believe all these factors could cause an ‘overhang’ on MMC’s share price in the near to medium term.

Valuation  As such, we widened our SoP’s holding discount to 40% from 30% previously to reflect the higher level of uncertainties in the group’s direction. As a result, our Target Price is revised downward to RM2.41 from RM2.81 previously. This implies 20x FY15 Fwd-PER, 20% discount to its 5-year average Fwd-PER of about 25.0x.

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

 Higher-than-expected costs from Malakoff earnings

Source: Kenanga