MMCCORP has completed the acquisition of 49% in Penang Port, which was announced in Aug 2016. This is despite it not disposing the ferry business which was part of the condition precedent. We are long-term positive and expect the port to contribute to earnings by 2Q17, at 2-4% in FY17-18E, while we expect disposal of the ferry business by end FY17. Maintain MARKET PERFORM but upgrade TP marginally to RM2.74 (from RM2.70).

Acquisition of Penang port completed prior to disposal of the ferry business. MMCCORP has completed the acquisition of a 49%-stake in Penang Port for RM200m (previously announced in Aug 2016). However, the Group is now varying the terms of the SPA which no longer requires the disposal of the ferry business which was initially a condition precedent. The disposal of the ferry business is still on the table and we believe it is likely to happen by end FY17. (refer overleaf).

Long-term positive on the deal as it is in line with Group’s overall strategy to grow the ports segment. To recap, we are long- term positive on this acquisition as it is in line with MMCCORP’s 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 (refer to report dated 8th August 2016, Porting in Penang).

Impact to earnings not overly significant. Post imputing for the contributions from Penang port by 2Q17, we expect earnings to increase by 2.0-4.3% in FY17-18 to RM495.7-528.1m. Our earnings estimates are based on modest single-digit revenue growth for Penang Port in line with growth assumptions for other ports under our coverage, while we estimate low net margin assumptions of 6- 10% in FY17-18 (vs. 20-30% net margins for other ports under our coverage), pending disposal of its loss-making ferry business likely by end FY17. FY18 net margin assumptions are also modest and pending improvements in the ports operating efficiency in the longer run. Additionally, we expect net gearing to increase marginally from 0.77x to 0.79x in FY17 post the acquisition.

Maintain MARKET PERFORM but increase TP to RM2.74 (from RM2.70). We maintain our MARKET PERFORM call as most upsides have been priced in from recognitions for the construction and ports segment. Additionally, we have also imputed for valuations of Penang Port and are valuing it based on 1.0x PBV to maintain conservative valuations. All in, we increase our SoP driven target price to RM2.74 (from RM2.70) (refer to table below).

Source: Kenanga Research - 28 Mar 2017