MMCCORP has proposed the acquisition of the remaining 51% in Penang Port for RM220m. To recap, the Group has recently completed the acquisition of 49% of Penang Port (27th Mar 2017), while the disposal of the ferry business is still pending. We are long-term positive and expect the remaining 51% to contribute 1.1-3.4% in additional earnings for FY17-18E, while we expect disposal of the ferry business by end FY17. Upgrade to OUTPERFORM and TP to RM2.80.

Poised to own 100% of Penang Port. MMCCORP has proposed to acquire of the remaining 51% in Penang Port for RM220m from Seaport Terminal Johor Sdn Bhd (STJSB). This move is after it recently completed the acquisition of a 49% stake in Penang Port for RM200m (on 27th March 2017). The acquisition of the remaining 51% will require the ferry business to be disposed as part of the condition precedents, which we believe is likely by 4Q17.

We are long-term positive on the acquisition as it is in line with MMCCORP?s core growth strategy in the port and logistic industry. Pricing-wise, we believe the acquisition price of RM220.0m is fair given that it implies a price to book ratio of 0.96x based on FY16 numbers, which is close to the previous valuation for the 49% of Penang Port at 0.95x, whilst their acquisition for NCB Holdings was at 1.47x. However, note that Penang Port is less attractive compared to NCB in terms of profitability. (refer to report dated 28th March 2017, Completed Acquisition of Penang Port) Earnings impact not overly significant. After imputing for the contributions from the remaining 51% of Penang Port by 4Q17, we expect earnings to increase by 1.1-3.4% in FY17-18 to RM501.3- 546.3m (from RM495.7-528.1m). We are assuming modest single- digit revenue growth for Penang Port, in line with growth assumptions for other ports under our coverage, and 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. Lastly, we expect net gearing to increase to 0.81- 0.83x from 0.79-0.80x in FY17-18.

Near-term neutral but long-term positive on MOU with Sime Darby Property Berhad and Adani Ports to study the feasibility of developing an integrated maritime city on Carey Island. (refer overleaf)

Upgrade to OUTPERFORM and increase TP to RM2.80 (from MARKET PERFORM and TP of RM2.74). We upgrade our call on MMCCORP in light of its growing ports and logistics segment, while upsides appear attractive at current levels with 13.8% total returns from stable recognitions for the construction and ports segment. Additionally, we have also imputed for valuations of full contributions from Penang Port and are valuing it based on 0.94x PBV which is the effective price to book value based on FY16 numbers for Penang Port, and maintain conservative valuations post the disposal of the ferry business by end FY17. All in, we increase our SoP-driven target price to RM2.80 (from RM2.74) (refer to table below).

Source: Kenanga Research - 04 Apr 2017