Despite headline profit showing a heavy plunge due to one-offs, 3Q17 results were satisfactory at the core earnings level, driven by construction progress in KVMRT 2 coupled with higher ports activities. Moving forward, expect ports operations and construction earnings from KVMRT 2 to continue as main earnings contributor. Likewise, we believe the recent sell-down to be fundamentally unjustified, and thus, reiterate our existing OUTPERFORM call with an unchanged SoP-TP of RM2.85.

Within expectations. MMCCORP recorded 9M17 core net profit (CNP) of RM254.8m, arrived after excluding: (i) RM98m for a one-off provision impairment expense on SMART, and (ii) RM16m on losses from disposal. The set of results were within expectations at 71%/75% of our/consensus FY17 earnings forecasts. No dividends were announced, as expected.

Overall stronger results at the core level. While 3Q17 headline net profit of RM22.3m (-79% YoY, -65% QoQ) was heavily dragged down by the impairment expense on SMART, the results were overall stronger at the core earnings level, with 3Q17 CNP of RM133.8m representing 145%/134% gain on a YoY/QoQ basis. The stronger results were largely attributed to higher construction progress for KVMRT Line 2 project (current progress for elevated and tunnelling are currently at 12.3% and 17.9%, respectively, as compared to 8.9% and 11.5% last quarter), coupled with better performance from its ports, which saw segmental PBT growing 20%/8% YoY/QoQ.

Cumulatively YTD, 9M17 CNP improved 17% from 9M16, which recorded RM218m, mainly due to the similar aforementioned reasons, while also offset by the absence of land sale in Senai Airport Free Industrial Zone. Its ports operations 9M17 PBT grew a healthy 5%, helped by higher contribution from PTP and Johor Port, coupled with the new inclusion of Penang Port.

Ports and KVMRT 2 as main earnings contributors. Moving forward, the group’s stable ports business is expected to remain as its largest earnings contributor at this juncture. MMCCORP is understood to be in talks for a stake in Sabah Ports, which would further bolster its profile as the largest port operator in the country, if successful. Likewise, completion of a complete takeover of Penang Ports (currently, it owns 49%) would further boost its ports earnings. Meanwhile on its construction side, bulk of the segment’s earnings is largely driven by KVMRT 2 tunnelling and PDP works, which is expected to keep them busy for the next few years. Other construction projects currently in its order-book include the Langat Sewerage Project and a PDP-role for the Pan Borneo Highway in Sabah.

Maintain OUTPERFORM. No changes made to our SoP-derived Target Price of RM2.85. Our FY17-18E earnings forecasts were marginally trimmed by 3-2%, after taking into account: (i) recent earnings cut in MALAKOF by 12-11%, and (ii) slight adjustments made to our construction progress assumptions. Our OUTPERFORM call is premised on MMCCORP being a solid SoP play, with the potential spinoff listing of its ports operations to possibly act as a further rerating catalyst. Likewise, we believe the recent sell down is fundamentally unjustified, and thus, would provide an attractive level for entry.

Risks to our call include (i) lower-than-expected ports activities, (ii) slower-than-expected construction progress, and (iii) de-rating of its associates MALAKOF and GASMSIA.

Source: Kenanga Research - 23 Nov 2017