9M18 results came in above our expectation at 111% due to our conservative top-line estimates and stronger-thanexpected PBT margins, but results are below consensus at 46%. Going forward, the ports segment and MRT Line 2 are expected to remain as major earnings contributors to MMCCORP. All-in, we increased FY18-19E CNP by 35-24% to RM119-95m. Maintain OUTPERFORM and TP of RM1.30.

Above our but below market’s expectations. 9M18 core net profit (CNP) of RM97.4m came in above our expectation at 111%, but below consensus at 46%. The deviation from our estimate was mostly due to our conservative top-line assumptions for the ports segment as 9M18 came in at 97% of our top-line, while Group PBT margin of 5.6% in 9M18 were stronger than our expectation of 3.4% due to better cost management observed this quarter. Meanwhile, we believe the deviation from the consensus was due to consensus bullish top-line target and low effective tax rate assumptions. No dividends, as expected.

Results highlights. YoY-Ytd, top-line was up by 17% due to; (i) higher cumulative work progress from KVMRT-SSP Line, (ii) contributions from Penang Port Sdn Bhd (PPSB), (iii) higher volume handled at Port of Tanjung Pelepas (PTP), and (iv) work progress at Langat Sewerage Treatment project. However, PBT decreased by 26% due to: (i) lower contribution from Johor Port Berhad (JPB) and Northport Malaysia Berhad (NMB), (ii) lower share of profit from Energy & Utilities division, and (iii) lower contribution from KVMRT-SBK Line following full completion in 3Q17. CNP was 61% lower after excluding a one-off impairment in 9M17 of RM98m. QoQ, top-line was down by 21% on weaker contributions from the Engineering and Construction division due to lower work progress from the KVMRT-SSP line. However, PBT increased by 121% on: (i) lower cost of sales (-31%), (ii) higher investment income of RM50m, (iii) lower operating expenses (-39%), and (iv) higher associates contributions (+62%). All in, CNP was up by 155% after excluding a one-off loss on disposal for RM12.2m.

Outlook. We expect MMCCORP’s earnings outlook to rely heavily on ports operations going forward. Currently, its ports portfolio consists of Port of Tanjung Pelepas (PTP), Johor Port, Northport, as well as the recently acquired Penang Port. We do not discount management’s continued pursuit to acquire additional ports to boost its profile as the largest port operator in the country. Construction progress for MRT Line 2 is at 30% for the elevated portion, and 39% for tunneling portion, with expected completion in 2022.

We increase FY18-19E CNP by 35-24% to RM119-95m (from RM88- 76m) on the back of higher volume for the ports segment and slightly better PBT margins of 3.8-2.8% (from 3.4-2.4%) in FY18-19E.

Maintain OUTPERFORM and TP of RM1.30 as MMCCORP is a compelling SoP-play at current levels. Note that we have recently lowered our valuations post; (i) removing Senai Airport land (valued on land basis at RM20psf over 2,080ac) from our SoP valuations due to the lack of land sales in recent years, and (ii) our SoP discount rate of 25% is slightly more conservative than in-house levels of 15-20%. Even so, we believe our OUTPERFORM call is justified at current record low PBV levels of 0.3x (vs. 5 year average of 0.8x). Note that the group’s port business makes up the largest portion of its valuations, as well as listed associates MALAKOF and GASMSIA, while further upsides could come from potential sale of the Senai Airport land and prompting us to include it back into our SoP, and consistent margin improvements in coming quarters.

Source: Kenanga Research - 28 Nov 2018