Last Friday, MMC Corporation (MMCCORP) announced that they have acquired a 49% stake in Penang Port for RM200.0m. We are positive with the acquisition as it is inline with their growth strategy to growing their port business. Furthermore, we deem the acquisition price fair as it implies historical price to book ratio of 0.95x, lower compared to its acquisition of NCB at price to book ratio of 1.47x. No changes in FY16-17E earnings. Maintain OUTPERFORM and Target Price at RM2.67.

Penang Port. Last Friday, MMCCORP announced that they are acquiring a 49% stake in Penang Port from Seaport Terminal (Johore) Sdn Bhd for a total consideration of RM200.0m. Penang Port is located in the state of Penang, which is one of the oldest and established ports in Malaysia serving as a main gateway for shippers in the northern states of Malaysia and southern provinces of Thailand. Penang Port handles all types of cargo such as containers, liquid bulk, dry bulk and break bulk.

On the right track. We are positive on this development as it is inline with their core growth strategy in the port and logistic industry. In terms of pricing, we deem the acquisition price of RM200.0m as fair given that it implies historical price to book ratio of 0.95x, whilst their previous acquisition on NCB Holdings implies a price to book ratio of 1.47x. However, in terms of profitability, it is less attractive compared to NCB.

No changes in estimates… At this juncture, we are keeping our earnings estimate for MMCCORP as we have yet to impute any potential earnings contribution from Penang Port as it hinges on the Penang Port’s ability in disposing its ferry business, which is part of the condition precedent set in the sales and purchase agreement for the 49% stake. Nonetheless, we are expecting FY17E net gearing to inch up to 0.77x from 0.75x should the acquisition be successful in FY17 as per their guided timeline.

Outlook. Going forward, MMCCORP’s near-to-medium term prospect remains bright backed by its steady port business and also the commencement of the tunnelling works for MRT2 amounting to RM15.5b, which will provide steady earnings contribution to the group for the next five years. As for its land sales in Johor, we do not expect any transaction for the year due to the soft property market.

OUTPERFORM maintained. We continue to maintain our OUTPERFORM call on MMCCORP as we still like its growing port business coupled with a steady contribution from its construction division being a PDP for MRT2 and Sabah Pan Borneo. No changes to our Target Price of RM2.67 which implies FY17E Core PER of 25.6x.

Risk to our call includes below-than-expected new contracts assumption, slower-than-expected construction progress, delayed MRT2 award and slower-than-expected port activities.

Source: Kenanga Research - 8 Aug 2016