The potential listing of MMCCORP’s ports operations in the coming 1-2 years may serve as a re-rating catalyst, with the group currently holding the status of being the largest port operator in the country. In bolstering its prospects, MMCCORP was recently in talks with SURIA over a stake in Sabah Ports, which would potentially add another 8 ports into the group’s profile. Meanwhile, the development of Carey Island into a major port-industrial city will also serve as another long-term booster for the group’s ports-centric story. Maintain OUTPERFORM with TP of RM2.90.

Bolstering its profile as the largest port operator in the country. MMCCORP has been widely understood to be seeking listing for its ports operations in the coming 1-2 years. It is currently deemed as the largest ports operator in the country, having operations in most of the major ports along the west coast of Peninsular Malaysia. In its efforts to bolster its profile, MMCCORP recently confirmed that it is in talks to acquire a stake in Sabah Ports. If talks go through, this would potentially add another 8 Sabah ports into MMCCORP’s current ports profile.

Indicative valuation of Sabah Ports. Sabah Ports is currently whollyowned by SURIA (contributing >90% of its revenue), which in turn has the Sabah state government effectively as its largest shareholder at 50.7% stake. As such, we reckon that MMCCORP would most likely end up with an associate’s stake, with SURIA maintaining control over Sabah Ports. Taking SURIA’s market cap as an indicative acquisition price, an assumed 30% stake would arrive at a value of around RM187m, and implying valuations of 10x PER and 0.6x PBV, potentially contributing approximately an additional 3-4% to FY17-18E earnings. Likewise, including this assumed stake into our SoP-TP would also tentatively imply an additional 5.0 sen upside. We believe the group should have the financial capacity to stomach an acquisition of around that value, with minimal impact towards its net-gearing (currently at around 0.8x) even if entirely funded by borrowings. Likewise, we also do not discount the possibility of any future acquisitions leading up to the listing of MMCCORP’s ports operations.

A longer-term play in Carey Island. MMCCORP and SIME had previously entered into an MOU to study the feasibility of developing an integrated maritime city in Carey Island. Although currently still in its early conceptualisation stages, if materialised, Carey Island may potentially be a game-changer for the local industries. With total port capacity reported at around 30m TEUs/year, this represents almost twice of Port Klang’s current capacity, with the industrial city development to be the main driver of volume to meet this capacity. At MMCCORP’s level, we reckon that the materialisation of such a plan would see a potential capex ranging at RM30-60b, with the timeline for the entire project totalling 20 years, being developed in phases.

Maintain OUTPERFORM, with unchanged SoP-TP of RM2.90. We are retaining our earnings forecasts for now, pending the release of its upcoming 2Q17 quarterly results later this month. While the ports segment is expected to stay relatively stable, risks in earnings swing may potentially come from: (i) slower-than-expected earnings recognition from its construction projects, and (ii) absence of land sale in Senai Airport City.

Source: Kenanga Research - 17 Aug 2017