Despite expecting a loss on disposal of c.RM20m, we are positive on the MoF’s Takeover Offer for SMART Tunnel as MMCCORP would be exiting the loss-making concession should the deal conclude by this year end. In addition, with the RM184.5m disposal proceeds, there could be a special dividend in the cards. We keep our MARKET PERFORM call with an unchanged target price of RM1.10.

SMART Tunnel Takeover Offer. Yesterday, MMCCORP announced that the Ministry of Finance (MOF) has offered to acquire the SMART tunnel, which is a 50:50 JV between GAMUDA and MMCCORP, for a total cash consideration of RM369.0m. This means that the cash offer for MMCCORP’s portion would be RM184.5m, which translates into an effective equity value of RM30.0m. The offer remains valid until 12th July 2019, and subject to conditions to be satisfied, with the take-over deal to be completed on 31st December 2019.

Positive news as to exit the loss-making concession. With the MOF’s implied valuation of RM30m for SMART tunnel standing at a 40% discount to an estimated book value of c.RM50m, we reckon that the deal will translate into a loss on disposal of ~RM20m for MMCCORP. Despite that, we deem the takeover price to be fair and it is positive for the group. This is pinning on the fact that SMART tunnel has been loss-making for the past three financial years, with after-tax loss of c.RM5.0m registered in FY18, which was dampened by low traffic volumes. Hence, we believe that this poses as a great opportunity for the group to exit its loss-making asset.

Minimal financial impact but with potential special dividend. Overall, we are positive on the news. We expect the disposal to contribute roughly 2-3% positive earnings impact towards its FY20E numbers, while balance sheet impact is also expected to be minimal, with net-gearing of 0.9x remaining intact. Meanwhile, we do not discount the possibility of a special dividend, assuming a 50% pay-out from cash proceeds of RM184.5m, this would possibly translate into a special dividend per share of 3.0 sen.

Reiterate MARKET PERFORM with an unchanged TP of RM1.10 as we ascribed 0.3x PBV to FY20E BV/share of RM3.24, which is in-line with its 5-year historical trough levels while implying a FY20E PER of 18x. Meanwhile, we made no changes to our FY19-20E numbers given the minimal impact from the aforementioned disposal. We also believe our target price is fair at this juncture, pending more earnings stability and margin improvement in the coming quarters, which is yet to be seen.

Risks to our call include: (i) lower-than-expected ports activities, and (ii) slower/faster-than-expected construction progress.

Source: Kenanga Research - 25 Jun 2019