MMC made two material announcements yesterday: (i) proposed listing of 51%-owned Malakoff, and (ii) signing SPA with MISC to acquire the latter’s 15.73% stake in NCB at RM222m (RM3.00/NCB shares). As for Malakoff proposed listing, we were positively surprised as the IPO process has started faster-than-expected despite the group’s pending issue on Tanjung Bin’s extension delay. As most of the proceeds will be utilised to pare down its debts, we estimate post-listing (est: in 2Q15), MMC’s net gearing would be substantially declined to 1.01x from current of 2.06x. As for MMC buying 15.73% stake in NCB, we are Neutral to Positive on the announcement as we believe this acquisition could be for a “long-term strategic reason”. We welcome the possibility of MMC leveraging on NCB as a vehicle to list both MMC’s port businesses i.e. PTP and Johor Port, hence unlock their lucrative port assets value. Going forward, we believe, after Malakoff listing, we believe that MMC would focus more on its growing construction segment. In fact, MMC is the biggest beneficiary of the upcoming MRT2 story given the group’s status as MRT2’s PDP and potential wins for the project’s tunnelling package. All in, we maintain our forecasts but upgrade our Target Price to RM3.21 (from RM2.41) and rating to OUTPERFORM from MARKET PERFORM previously. This is after reducing its holding discount to 20% from 40% previously to reflect the group’s better prospects after seeing faster-than-expected Malakoff listing process and clearer business direction.

To list Malakoff in 2Q15. MMC announced yesterday that it proposes to list Malakoff via offer for sale and new shares issuance totalling 1.52b of shares. Out of 1.52b shares, (i) 10.4% or 521.7m of shares will be offered for sale (OFS) by the existing shareholders, and (ii) the remaining 20% or 1.0b of shares will be public issue. Proceeds from the IPO are proposed to be utilised to repay debts, expansion of business, working capital and other general corporate purposes. Our SoP values Malakoff’s market capitalisation at RM6.91b or RM1.38 per share based on DCF-based valuation, implying Malakoff’s FY15 PER of 12.3x. Hence, MMC would be able to raise proceeds of about RM2.1b. Post-listing, MMC’s shareholdings will be diluted to 37.8% from currently 51%. This will result in MMC classifying Malakoff as associate and hence Malakoff’s balance sheet will be de-consolidated. We expect MMC net gearing ratio to improve from 2.06x to 1.01x and earnings should increase by 6%-7% as a result of interest savings after Malakoff listing.

Buying 15.7% stake in NCB. Separately, MMC announced that it is acquiring MISC’s 15.73% stake in NCB Holdings (UNDERPERFORM; TP: RM1.83), for a cash consideration of RM222.0m (RM3.00/NCB share). We are Neutral to Positive on the announcement as: (i) MMC is buying the stake at 1.01x price to NCB’s book value of RM2.96/share vs average ports’ peers PBV average of 1.4x, (ii) MMC is buying the stake at 14% premium to its current share price of RM2.63/share, (iii) if we built-in NCB’s values based on Kenanga Fair Value of RM1.83/share in our SoP, our TP will only be reduced by 2 sen to RM2.39, (iv) post-acquisition, MMC’s impact to balance sheet is minimal i.e. net gearing ratio to increase to 2.09x from 2.06x. We also do not think this acquisition is just for MMC’s normal investment as we estimate MMC will only get 0.3% dividend yield from NCB, far lower than even FD rate of 4%. Hence, we believe this acquisition could be for a “long-term strategic reason”. We welcome the possibility of NCB being used as a vehicle to list both MMC’s port assets i.e. PTP and Johor Port as finally MMC can unlock their lucrative port businesses. We value both PTP (1.5x PBV) and Johor Port (1.0x PBV) at RM3.85b (RM1.26/MMC share).

What’s next? We believe, after Malakoff listing, MMC would focus more on its growing construction segment. In fact, MMC is the biggest beneficiary of upcoming MRT2 story given the group’s status as MRT2’s PDP and potential wins for the project’s tunnelling package. Hence, eventually, we expect MMC will be appreciated by investors as one of the prime beneficiaries of the MRT story. This is evidenced by looking at Gamuda’s share price performance after the announcement of MRT2’s PDP appointment to MMC-GAMUDA. Gamuda’s share price has gone up by 5.8% since the announcement.

Upgrade to OUTPERFORM with higher Target Price of RM3.21. Our forecasts are relatively unchanged as: (i) we rather wait for full details of Malakoff listing, and (ii) NCB’s dividend that will contribute to MMC’s net profit is immaterial. All in, we are now turning bullish on the group’s outlook especially after seeing the group’s faster-than-expected Malakoff IPO. Furthermore, it would be timely for investors to appreciate MMC if it is to list Malakoff in 2Q15 as we expect MRT2 to start its tendering process by 2H15. Hence, due to all of these and after considering the stock’s risk-reward ratio, we decided to upgrade MMC rating to OUTPERFORM from MARKET PERFORM previously with higher Target Price of RM3.21 (from RM2.41). This is after reducing its holding discount to 20% from 40% previously to reflect the group’s better prospects in the near-long term and clearer business direction.

Source: Kenanga