1H19 earnings which jumped 126% YoY to RM104.3m came in broadly within expectations, boosted by stronger performance from its ports & logistics segment. Moving forward, ports and MRT Line 2 remain as main earnings contributors. Nonetheless, as outlook remains clouded by the lack of earnings stability, we reiterate our MP call with unchanged TP of RM1.10 based on 0.3x PBV which is in-line with its 5-year historical trough levels.

Within expectations. 1H19 core net profit of RM104.3m (arrived at after stripping one-off disposal gain of RM16.4m) came in broadly within expectations at 56%/50% of our/consensus’ estimates, as we remain cautious on a potentially weaker second half for the group’s ports segment, against the backdrop of the current global uncertainties. No dividend was announced, as expected.

Lifted by better ports performances. YoY, 1H19 CNP of RM104.3m soared 126%, largely led by stronger performance from its ports and logistics segment (+62% PBT), thanks to: (i) higher volume from Port of Tanjung Pelepas (+5% throughput growth), and (ii) various operational cost savings initiatives, which saw overall PBT margins for the segment expanding 4ppt to 14%. Nonetheless, this was slightly dented by lower contribution from its construction business (-22% PBT) no thanks to slower work progress for MRT Line 2 and Langat Sewerage project. For 2Q19, CNP was up by 153% to RM50.8m, similarly due to the aforementioned reasons.

QoQ, 2Q19 CNP slid 22%, largely attributed to higher tax (+113%) and adjustments for one-off disposal gain. Nonetheless, earnings were up by 4% at the net profit level as better performances from ports & logistics were slightly shadowed by weaker contributions from MALAKOF with its group earnings declining 22% QoQ.

Ports and MRT 2 as main earnings contributors. Going forward, MMCCORP’s earnings are anticipated to be largely buoyed by its ports operation coupled with the construction and tunneling works for MRT Line 2. Currently, its ports portfolio consists of Port of Tanjung Pelepas (PTP), Johor Port, Northport, Penang Port and Tanjung Bruas Port. That said, we do not discount management continuing their pursuit to acquire additional ports to boost its profile as the largest port operator in the country. Meanwhile, the construction progress from MRT Line 2 is at 51% for the elevated portion, and 57% for tunneling portion as at June 2019, with expected completion in FY20. We gathered that while its construction order-book is currently at c.RM8.6b (90% from MRT Line 2), management is currently actively bidding for new projects in order to meet its targeted order-book replenishment of c.RM500m p.a.

Maintain MARKET PERFORM with an unchanged TP of RM1.10 based on FY20E BV/share of RM3.24, based on 0.3x PBV which is inline with its 5-year historical trough levels. Post-result, we made no changes to our earnings. At this juncture, we deem our valuations to be fair as we await more earnings stability and margin improvement in coming quarters.

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

Source: Kenanga Research - 28 Aug 2019