1Q18 results came in grossly below expectations, dragged by poor performances from its ports, especially Johor Port and Northport, coupled with mild earnings disappointment in listed associates MALAKOF and GASMSIA. All-in, we slashed FY18-19E earnings by 33-46%, and revised TP to RM2.20. Going forward, ports and MRT Line 2 still remain as main earnings contributors to MMCCORP. Maintain OUTPERFORM, premised on its compelling SoP-valuation.

Grossly below expectations. 1Q18 core net profit (CNP) of RM26.1m (arrived after stripping off remeasurement gain of investments of RM15.2m) came in grossly below expectations, making up only 9%/5% of our/consensus full-year FY18 estimates. We believe the disparity was due to: (i) poorer-than-expected performances from its ports segment, especially in Johor Port and Northport, coupled with (ii) mildly disappointing results in its associates, i.e. MALAKOFF and GASMSIA. No dividends were announced, as expected.

Results dragged by ports’ poorer performances. YoY, 1Q18 CNP plunged 52%. This was mainly due to poorer performance from its ports and logistics (segmental PBT lower by 46% YoY), dragged by huge drops in Johor Port and Northport. Johor Port saw lower contribution from RAPID Material Offloading Facilities, while Northport saw significantly lower container throughput by 14% YoY. This was coupled with weaker MALAKOF’s earnings by 46% YoY, offset by stronger construction earnings (segmental PBT +185% YoY) from MRT Line 2 construction progress. Sequentially, CNP dropped by 10% QoQ. Ports’ segmental PBT came in lower by 42% QoQ due to aforementioned reasons, while construction segmental PBT was also lower by 30% QoQ from lesser work done for MRT Line 2. However, these were offset by stronger performance from MALAKOF, with its group earnings improving 21% QoQ.

Ports and MRT Line 2 remain as main earnings drivers. Moving forward, we believe MMCCORP’s earnings outlook is highly dependent on its ports operations, and the construction PDP and tunneling works for MRT Line 2. Currently, its current ports portfolio consists of mainly Port of Tanjung Pelepas, Johor Port, Northport, as well as the recently acquired Penang Port. That said, we do not discount management’s continued pursuit in acquiring additional ports in efforts to boost its profile as the largest port operator in the country. Meanwhile, construction progress for MRT Line 2 is currently at 19% for the elevated portion, and 28% for tunneling portion, with expected completion in 2022.

Maintain OUTPERFORM, on the basis of being a compelling SoP-play, with its valuations backed by market cap of listed associates MALAKOF and GASMSIA. Post-results, we slashed our FY18-19E earnings by 33- 46%, after massively cutting our earnings assumptions for Johor Port and Northport, while also taking into account recent earnings cut in MALAKOF and GASMSIA. Similarly, our SoP-TP is also lowered to RM2.20, from RM2.50 previously, after rolling forward our valuation base year to FY19. 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 - 30 May 2018