Although a soft 1Q17 result, we believe our full-year earnings forecasts to be still intact, in anticipation of stronger earnings in the remaining quarters, driven by KVMRT Line 2 construction works. Meanwhile, the upcoming full acquisition of Penang Port will see MMCCORP operating most of the major ports along the West Coast, with the business segment continuing to be the main earnings contributor for the group. We maintain our MARKET PERFORM with a higher target price of RM2.90.

Broadly within expectations. Coming in at 11% of ours and consensus?s full-year FY17 earnings forecasts, we deemed 1Q17 core net profit (CNP) of RM54.9m to be broadly within expectations as we foresee stronger earnings in the remaining quarters, largely underpinned by construction works from KVMRT Line 2. No dividend was declared, as expected.

YoY results highlights. While 1Q17 revenue only saw a marginal drop of 1% YoY to RM925.2m from RM936.2m in 1Q16, CNP declined 22% from RM69.9m after adjusting for unrealised forex losses and losses from PPE in 1Q16, contributed by 54% lower JV earnings from RM23.9m to RM11.1m. This was largely due to substantial completion of the KVMRT Line 1, which offset the higher contributions from its associates by 87% from RM30.6m to RM57.3m. Furthermore, its main ports business also suffered from deteriorated margins, with PBT margins declining from 21% to 17%, due to change in network strategies in PTP to improve customer retention.

Heavy deterioration sequentially. QoQ-wise, CNP declined 79% to RM54.9m from RM266.6m in 4Q16, largely due to (i) heavier earnings recognition from KVMRT Line 1 project as the project was at its tail-end stages, and (ii) Senai Airport City land sale in 4Q16, while slightly offset by better earnings from its ports business, with segmental PBT improving by 19% from RM104m to RM142m.

Ports and KVMRT 2 as main earnings driver. Moving forward, the group?s ports business would continue to serve as its largest earnings contributor. The upcoming full acquisition of Penang Port would see MMCCORP operating most of the major ports along the West Coast of Peninsular Malaysia. Recent reshuffling of shipping alliances is also believed to be largely neutral towards MMCCORP as PTP mainly serves members of the 2M alliance, which saw relatively minimal changes during the reshuffling. Meanwhile for its construction segment, forward earnings will mostly come from the KVMRT Line 2 project, with the group having undertaken underground works and a Project Delivery Partner role. Other construction projects currently in the orderbook include the Langat 2 Water Treatment Plant, Langat Centralised Sewerage Project, and Pan Borneo Sabah Highway.

Maintain OUTPERFORM. Post-model update, we raised our SoP-TP to RM2.90, from RM2.80 previously, after we (i) rolled-over our valuations to FY18, and (ii) increased our valuation for PTP to 2.5x PBV from 1.5x previously, due to the relatively overall positive outlook, which is still a huge discount compared to its closest peer WPRTS currently trading at 6x PBV. Our FY17-18E earnings were also marginally tweaked by -0.8% for housekeeping purposes.

Risks to our call include (i) lower-than-expected throughput volumes for its ports, and (ii) delayed works done for its construction projects.

Source: Kenanga Research - 30 May 2017