FY18 earnings came in above our expectation at 129% due to our conservative top-line estimate, but below consensus at 91%. No dividend was announced, against our 1.0 sen expectation. Going forward, the ports segment and MRT Line 2 are expected to remain as major earnings contributors. All-in, we increase FY19E CNP by 36% to RM129m and introduce FY20E numbers. Maintain MARKET PERFORM on a higher TP of RM1.10 (from RM0.950).

Above our estimate but below consensus’. FY18 core net profit (CNP) of RM153.3m came in above our expectations at 129%, but below consensus at 91%. The deviation from our estimates was due to our conservative top-line assumptions for the engineering and construction segment as FY18 came in at 129% of our top-line, while Group CNP margin of 3.1% in FY18 was spot-on with our expectation. Meanwhile, we believe the results missed consensus expectations due to consensus’ bullish CNP margin assumption of 4.0%, as top-line exceeded expectations by 20%. No dividends were announced, which is below our expectation of 1.0 sen dividend in FY18.

Results highlight. YoY-Ytd, top-line was up by 20% due to; (i) higher cumulative work in progress from KVMRT-SSP Line, (ii) contributions from Penang Port Sdn Bhd (PPSB), and (iii) higher volume handled at Port of Tanjung Pelepas (PTP). However, PBT decreased by 11% due to: (i) lower contribution from Johor Port Berhad (JPB) and Northport Malaysia Berhad (NMB), (ii) completion of the KVMRT-SBK Line in 3Q17, (iii) excluding a gain on disposal of securities (RM65.7m) in FY17, and (v) higher administrative expense (+4.2%) and operating expense (+6.9%). All in, CNP was down by 27% post excluding one-off amounting to RM66.8m mainly from; (i) RM51.7m negative goodwill, and RM15.2m re-measurement gain on investment. QoQ, top-line was up by 68% driven by the engineering and construction segment (+474%) on higher work progress from the KVMRT-SSP line which cascaded to a higher PBT (+121%). All in, CNP was up to RM109.7m (vs. CNL of RM2.7m in 3Q18) given a higher effective tax rate in 3Q18 (+9.6ppt) and post excluding the negative goodwill of RM51.7m in 3Q18.

Outlook. We expect MMCCORP’s earnings outlook to rely heavily on ports operations going forward and bolstered by the construction and engineering segment. Currently, its ports portfolio consists of Port of Tanjung Pelepas (PTP), Johor Port, Northport, and 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 35% for the elevated portion, and 45% for tunneling portion as at December 2018, with expected completion in 2022.

Increase FY19E CNP by 36% to RM129m and introduce FY20E CNP of RM133m. We revise up FY19E earnings by 36%, as we increase our billings recognitions slightly in FY19 as MRT Line 2 is progressing well given that we expected billings to be slower previously, and account for increased earnings for associate MALAKOF (+26%) in line with our inhouse estimates.

Maintain MARKET PERFORM on a higher TP of RM1.10 (from RM0.950). Due to earnings volatility, we are switching our valuation methodology to Fwd. PBV basis. Our new TP is based on FY19E BV/share of RM3.19 while we apply a PBV of 0.34x which is at its 5- year historical trough levels. Our TP is at a 21% discount to its SoP of RM1.39. The stock has recently rebounded 37% YTD (11% yesterday alone) likely due to better broader market sentiment. We believe our call and TP are justified at this juncture pending more earnings stability and margin improvement in coming quarters which is yet to be seen, but this would prompt us to upgrade our valuations and call further.

Source: Kenanga Research - 28 Feb 2019