1H18 results came in below consensus (14%) and our (24%) expectations, dragged by lower associate contributions and higher-than-expected tax rates. Going forward, ports and MRT Line 2 are expected to remain as major earnings contributors to MMCCORP. All-in, we slashed FY18-19E earnings by 45-34% to RM105-128m. Maintain OUTPERFORM but lower TP to RM1.95 (from RM2.20) on a wider SoP discount.

Below expectations. 1H18 core net profit (CNP) of RM46.2m came in below both consensus and our expectation at 14% and 24%, respectively. Top-line was within, but the deviation vs. our estimate was due to: (i) lower-than-expected contributions from associate MALAKOF and, (ii) higher-than-expected tax expense of 19% vs. our expectation of 12%. No dividends, as expected.

Results highlights. YoY-Ytd, top-line was up by 33% due to; (i) higher work progress from the KVMRT-SSP line, (ii) increased volume handled at PTP, and (iii) consolidation of Penang Port Sdn Bhd (PPSB), while cost of sales increased by 49%, causing gross profit to increase by only 7%. However, CNP declined by 62% on; (i) higher financing cost (+8.5%), (ii) lower contributions from associates (-49%) mostly due to weaker contributions from MALAKOF on lower fuel margin at the coal plants, lower contribution from associates and lower contribution from Segari Energy Venture’s (SEV) plant, (iii) lower joint ventures (-27%) contributions, and, (iv) Ports and Logistics segment (-43%) on weaker contributions from Johor Port and Northport.. QoQ, top-line was down by 6% on lower contributions from the engineering segment this quarter. Meanwhile, (i) higher administrative expenses (+4%), (ii) higher other operating expenses (+14%), (iii) lower contributions from associates due to similar reasons mentioned above (-45%), and (iv) higher effective tax rate (27% vs 14%) caused CNP to decline by 23%. Note that this is after stripping out a one-off re-measurement gain of investment of RM15.2m in 1Q18.

Outlook. We believe MMCCORP’s earnings outlook is mostly dependent on its ports operations, and the construction PDP and tunneling works for MRT Line 2. Currently, its ports portfolio consists of Port of Tanjung Pelepas (PTP), Johor Port, Northport, as well as the recently acquired Penang Port. That said, we do not discount management’s continued pursuit to acquire additional ports to boost its profile as the largest port operator in the country. Meanwhile, construction progress for MRT Line 2 is currently at 24% for the elevated portion, and 33% for tunneling portion, with expected completion in 2022.

Trimming earnings by 45-34% in FY18-19E to RM105-128m on: (i) lower contributions for associates (i.e. MALAKOF) as per our internal forecast, (ii) increased our effective tax rates to 20-22%, closer to current levels (from 12-18%) and (iii) increased borrowing cost marginally (+5%) to be in line with current levels, while net gearing is maintained at 0.8x each in FY18-19.

Maintain OUTPERFORM but lower TP to RM1.95 (from RM2.20). Our lower TP is premised on a wider discount to our SoP valuations to 35% (from 30%) in light of weaker-than-expected earnings, while our discount rate is more conservative than our in-house SoP holding discount of c.20%. Even so, MMCCORP remains a compelling SoP- play while a potential spin-off of its ports operations acts as a re-rating factor. MMCCORP’s valuation is backed by market cap of listed associates MALAKOF and GASMSIA.

Source: Kenanga Research - 27 Aug 2018