Period

1Q15

Actual vs. Expectations

1Q15 core net profit (CNP) of RM95.7m came within expectations, making up 29% and 24% of our and market estimates, respectively.

Dividends

None as expected.

Key Results Highlights

QoQ, 1Q15 core net profit fell by 45% dragged down by: (i) high base effect from Malakoff. Recall, Malakoff was able to claim reimbursement from TNB for unutilized scheduled outage hour (USOH), (ii) higher base from its construction division as the Electrified Double Track Ipoh- Padang Besar project was fully completed last quarter.

YoY, 1Q15 core net profit jumped by three-fold boosted by Malakoff, construction division and ports and logistics segment. As for Malakoff, to recap, its Tg Bin plant was still under major maintenance in 1Q14 hence incurring abnormal costs. As for construction division, MRT1 construction was still at early-mid stage in 1Q14 as compared to 1Q15 when it reached the tail-end of the project. This resulted in higher margins. Meanwhile, PBT of port and logistics divisions grew by 15% thanks to higher throughput volume handled at PTP.

Outlook

Malakoff successfully listed on 15 May 2015. Recall, Malakoff’s IPO price was RM1.80, implying a market capitalization of RM9.0b. The IPO resulted in the deconsolidation and de-gearing of Malakoff from MMC. Furthermore, with this listing, MMC was able to raise proceeds of RM270.0m from the offer-for-sale. MMC will utilize the proceeds to pare down the group’s debt. Hence all in, we estimate the group’s net gearing to be reduced substantially to 0.6x from 2.1x previously. This will result in interest cost saving of about RM20.0m.

Why should we invest in MMC after Malakoff IPO? Post-listing of Malakoff, in the near-medium-term, MMC will be focusing on its three core businesses, namely construction, ports and logistics and land sales in Johor. (Refer overleaf)

Change to Forecasts

Revised FY15 earnings 6% lower as we estimate that the impact of the reduced stake in Malakoff to 37.8% from 51% is greater than the interest cost savings. We also introduced FY16E net profit of RM338.7m, representing 8% growth.

Rating

Maintain OUTPERFORM

Valuation

Post Malakoff listing, we believe MMC’s near-mediumterm outlook is still compelling driven by its other three core segments. Hence, we reiterate MMC as our top pick for the sector.

We adjust our SoP-based TP to RM3.10 from RM3.03 after: (i) adjusting MALAKOF’s market value, (ii) adjusting ZELAN’s market value, (iii) updating book value of PTP and Johor Port, and (iv) rolling forward our valuation parameter to FY16.

Our new TP implies FY16 PER of 27.9x, slightly higher than its 5-year average Fwd-PER of about 25.0x.

Risks to Our Call

Slower-than-expected construction progress

Delays/scrapped in MRT2 awards

Below-than-expected ports earnings

Source: Kenanga Research - 29 May 2015