MMC Corporation (MMCCORP)?s FY16 CNP of RM522.4m was above our (140%), and consensus (131%), expectations. No dividends declared, which was below our expectations of 3.5 sen. Outlook remains stable from port?s business and construction profits coming on- stream from MRT2. Lower FY17E by 1% and introduce FY18E earnings. Downgrade to MARKET PERFORM, as share prices have performed well YTD, but maintain TP of RM2.70.

FY16 core net profit of RM522.4m came in above our and consensus expectations at 140% and 131%, respectively. The strong deviation from both our and consensus estimates is likely due to a strong 4Q16 where the Group recognised higher contributions from the Engineering and Construction division from higher progress at Langat Sewerage Project and KVMRT Tunnelling Line 1. No dividends declared, which was below our expectation of 3.5 sen while the Group cited that a decision for a declaration of final dividend has yet to be made. MMCCORP does not have a formal dividend policy.

Results highlight. YoY-Ytd, FY16 CNP was up by 140% despite a declining top-line (-8%) due to the deconsolidation of MALAKOF in May 2015. However, bottom-line growth was supported by the engineering and construction segment (+102%) due to substantial completion of KVMRT-SBK Line, and Langat Centralized Sewerage Project. QoQ, CNP was up by 185%, making 4Q16 the strongest quarter to date mainly due to the Engineering and Construction segment for similar reasons mentioned above.

Outlook. MMCCORP?s earnings will be supported by its steady port business post the acquisition of NCB in Dec 2015 and pending the completion of Penang Port in FY17, which hinges on the disposal of its ferry business, while MMCCORP (on 3rd Feb 2017) announced a 6-month extension period for the seller to fulfil the conditions precedents for the said acquisition. Additionally, the commencement of the tunnelling works for MRT2 amounting to RM15.5b will provide steady earnings contribution to the group for the next five years. As for its land sales in Johor, the Group has c.4300 acres of land which it plans on disposing gradually depending on market conditions.

No significant changes to earnings. Post housekeeping, we have lowered FY17E earnings by 1% to RM486m and introduce FY18E NP of RM506m due to: (i) lumpy recognition from Langat Sewerage Project and KVMRT Tunnelling Line 1 in 4Q16, while we expect the remainder of recognitions from both projects to be paced out evenly over the next 2-3 years, with steady contributions from PDP for MRT2 and Sabah?s Pan Borneo, and (ii) improving operating margins for the ports segment in FY17-18E to c.40% (from 35%). Additionally, we are expecting single-digit throughput growth from the ports over FY17- 18E.

Downgrade to MARKET PERFORM but maintain TP of RM2.70. Prior to our Under Review recommendation, we had an OP call and TP of RM2.70. We downgrade our call as most upsides have been priced in as we do not expect strong recognitions from the construction segment to persist in coming quarters, while MMCCORP has done well YTD (+7.2%) suggesting limited upsides from current levels. We make no changes to our SoP driven target price of RM2.70 (refer to table below).

Source: Kenanga Research - 01 Mar 2017