1H17 core net profit of RM121 came in below expectations, deteriorating 26% YoY mainly due to the absence of Senai Airport land sales and substantial completion of KVMRT Line 1. Following that, we slashed FY17-18E earnings forecasts by 31-15%. Ports operations and construction revenue from KVMRT Line 2 is expected to be the main earnings driver moving forward. Upcoming listing of its ports operations may also potentially serve as a key rerating catalyst. Maintain OUTPERFORM, with lowered TP of RM2.85.

Below expectations. 1H17 core net profit (CNP) of RM121m came in below expectations at 24% of our and consensus full-year earnings forecasts, mainly due to: (i) slower-than-forecasted construction earnings recognition from KVMRT Line 2, and (ii) absence of Senai Airport Free Industrial Zone land sales. No dividends were declared, as expected.

1H17 CNP lower by 26%. 1H17 came in lower by 26% YoY, from RM163.3m in 1H16, mainly attributed to: (i) absence of Senai Airport Free Industrial Zone land sales, and (ii) lower construction profits due to substantial completion of the KVMRT Line 1. For 2Q17, CNP declined 29% YoY to RM66m, from RM93.3m in 2Q16 due to similar aforementioned reasons.

Better sequentially from KVMRT 2. QoQ-wise, 2Q17 improved 20% from RM54.9m in 1Q17, mainly due to higher construction earnings (segmental PBT +140%), which was heavily contributed by work progress from the KVMRT Line 2 project, coupled with a slight contribution from work progress in the Langat Sewerage Plant project.

Ports and KVMRT 2 main earnings contributors. Moving forward, the group’s ports business is expected to remain as its largest earnings contributor. MMCCORP currently holds the profile as the largest ports operator in the country, having operations at most major ports along the West Coast of Peninsular Malaysia. Likewise, the group had also recently confirmed talks for a stake in Sabah Ports, which would further bolster its profile as a ports operator, if successful. Meanwhile, earnings from its construction segment would mainly be driven by its JV with GAMUDA for KVMRT Line 2 tunnelling and PDP works. Other construction projects currently in its order-book include the Langat Sewerage Project and PDP-role for the Pan Borneo Highway in Sabah.

Maintain OUTPERFORM. Post-model update, we revamped our SoPvaluations to value MMCCORP’s ports operations on DCF methodology (from PBV valuations previously), in line with our other ports core coverage i.e. WPRTS and BIPORT that are already on DDM valuations. Our DCF-valuations are based on the assumptions of: (i) 10% WACC, and (ii) terminal growth of 1%. Furthermore, we slashed our FY17-18E earnings forecasts by 31-15%, as we: (i) removed our assumptions land sales in Senai Airport Free Industrial Zone for FY17-18, and (ii) re-adjusted our construction earnings recognition for KVMRT Line 2 tunnelling and PDP works. As such, our SoP-TP was revised lower to RM2.85 (from RM2.90 previously). Reiterate OUTPERFORM, with its upcoming listing of its ports operations as a potential key rerating catalyst. Risk to our call includes (i) lower-than-forecasted ports throughput, and (ii) slower-than-expected earnings recognition from its construction projects.

Source: Kenanga Research - 29 Aug 2017