What’s New

• Maiden meeting with CEO reveals a focused group
• Residual value does not factor in growing port business, peak orderbook and readily realisable land at Senai
• No rush to list port business
• BUY with TP of RM3.50 (40% discount to SOP)

Deep value conglomerate

Pricing of assets via listing is crucial. MMC is currently trading at a 60% discount to our SOP value. It has adopted the strategy of listing its key businesses, starting with Gas Malaysia in 2012 and Malakoff in 2015, to unlock value. This should provide at least a floor value for MMC. Based on Gas Malaysia and Malakoff’s market value, the market is assigning an unfair value to the unlisted businesses – ports, construction, the sole airport in Johor, water concession, and 4,556-acre land in Johor. But this strategy has also led to valuation issues for the group, where the listing of Malakoff was arguably done at premium valuations that eventually widened the holding company discount.

Listing of ports is next. MMC is looking to list its port division in 2018/19. At present, PTP and Johor Port are held directly under MMC while MMC Ports Sdn Bhd, a wholly-owned SPV, was used to acquire NCB and more recently Penang Port (49% stake). We understand PTP and Johor Port will be transferred to MMC Ports to facilitate the listing while we also think MMC Ports will acquire the balance 51% in Penang Port prior to the listing. Hence, the total portfolio size will involve up to four ports. What is crucial now is to grow further and integrate its port business to share common functions which should create more scale and synergies and eventually result in a better valuation.

Large-cap infrastructure proxy. MMC should get better recognition as an infrastructure proxy this year with the successful execution of the MRT Line 1 so far. Its current outstanding orderbook stands at c.RM20bn, of which MRT Line 2 PDP and tunnelling works are the largest contributor.

Valuation:

Our valuation of MMC is based on SOP, given the diversified business model – valuing its ports at DCF, Malakoff at market value, Gas Malaysia at our TP and land at a discount to market prices. We have assigned a 40% discount to SOP.

Key Risks to Our View:

Corporate governance and RPT. In our view, this is the biggest risk for MMC; the SATS acquisition in 2008 saw the share price being punished severely. Also, in 2009, MMC’s major shareholder Syed Mokthar made donations from his stable of companies under a corporate social responsibility programme, to Albukhary International University in Alor Setar.

Source: Alliance Research - 14 Feb 2017