INVESTMENT HIGHLIGHTS

• 9MFY16 earnings slightly below expectations

• Good performance from NCB

• Malakoff hit by rising expenses

• Engineering and construction gaining traction

• Maintain BUY with lower TP of RM2.94

9MFY16 earnings slightly below expectations. MMC’s 9MFY16 Core PATAMI of RM219m (+24%yoy) was slightly below expectations, making up 68% of our full year core PATAMI forecast of RM319m and 55% of consensus estimates. This is caused by higher than expected expenses for Malakoff.

Good performance from NCB. PBT for the ports segment saw an increase of +30%yoy with the consolidation of NCB. Excluding NCB Holdings, PBT would have flat year-on-year due to a contraction in container throughput at PTP (-9%yoy). We believe that the 2M alliance could have shifted some of its containers to Port of Singapore (PSA) as throughput at PSA has recovered to -2%yoy as at Oct 2016 from a steeper decline of -5%yoy as of June 2016. We also suspect that some of PTP’s containers could have been moved to NCB which made a remarkable recovery with PBT rising to RM95m (from: RM7m) benefitting from throughput increase of +14.2%yoy.

Malakoff hit by rising expenses. Malakoff recorded a -23%yoy decline in PATMI as it was hit by: 1) additional depreciation for its gas-fired power plants (GB3, Prai and SEV) due to change in residual value estimate; 2) lower contribution from Port Dickson; and 3) higher maintenance costs. These increases in expenses offset gains from the commencement of Tanjung Bin Energy.

The engineering and construction (E&C) segment continues to gain positive traction. PBT increased by +33%yoy in 9MFY16 from being flat year-on-year as at 6MFY16. The better performance was due partly to an absence in litigations on SMART and write back of provisions. More significantly, the Rapid Co-generation (Rapid Cogen) and Langat 2 projects are progressing well. We continue to be sanguine on the E&C segment as the Rapid Cogen and Langat 2 projects keep MMC busy before KVMRT2 and Pan Borneo Sabah projects commence.

Maintain BUY with lower TP of RM2.94. We lower our SOP derived TP to RM2.94 (from: RM3.11) as we reduce our earnings forecast for Malakoff by assuming higher expenses. However, we continue to rate MMC a BUY as we believe the company’s assets are underappreciated in terms of valuations. In addition, our BUY call is premised on: 1) Potential listing of its ports assets with newly acquired Penang Port to sweeten the deal; 2) Steady performance by the ports segment; and 3) Healthy order book for the construction segment of >RM9b which translates into ~10x FY15 construction revenue.

Source: MIDF Research - 25 Nov 2016