MMC Corporation (MMCCORP)’s 1H16 CNP of RM163.3m came above our but below streets’ expectation, making up 65% and 41% of the full-year estimates, respectively. No dividends declared as expected. MMCCORP’s outlook remains solid backed by steady performance from its port business and construction profits that are coming on-stream from MRT2. Raised FY17-18E core earnings by 48-55%. Maintain OUTPERFORM with a higher Target Price of RM2.70 (previously, RM2.67).

Above expectations. 1H16 CNP of RM163.3m was above our but below streets’ full-year estimates, making up 65% and 41% of our and streets’ estimates, respectively. The positive variance compared to our estimate is due to our overly conservative margin assumptions for its port business coupled with slower revenue recognition from its construction division. Likewise, we believe that shortfall with streets’ estimate could be due to a higher expectation of land sale recognition. No dividends declared as expected.

Results highlight. 1H16 CNP improved significantly by 42%, YoY despite a sharp drop of 45%, YoY in its revenue. The significant drop in revenue was due to the deconsolidation of MALAKOF. The improvements in its core earnings were mainly driven by ports division, which saw impressive improvements of revenue and pre-tax profits by 53% and 46%, respectively, post-acquisition of NCB. QoQ, the impressive improvements of 33% on its CNP was driven by higher contribution from its construction division on the construction works for Langat Centralized Treatment Plant, higher contribution from MALAKOF attributable to insurance claims and improved performance at ZELAN.

Raising estimates… Post results, we are upgrading our FY16-17E core earnings by 48-55% to RM371.5-491.6m as we raised our margin assumptions for its ports division and speed up the recognition progress for its construction works and also factoring higher contribution from its associates, especially from its PDP roles.

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 more land sale for the year due to the soft property market.

OUTPERFORM maintained. We reiterate 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. Post earnings upgrade, we also fine tuned our SOP and upgraded our Target Price to RM2.70 (previously, RM2.67).

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

Source: Kenanga Research - 26 Aug 2016