INVESTMENT HIGHLIGHTS

• Earnings enhanced by SAC land sale

• PTP to recover in 2017 after a poor 2016

• Gas Malaysia offset lower earnings at Malakoff

• Engineering and construction segment in full swing

• Maintain BUY with higher TP of RM2.98 (from: RM2.94)

Earnings enhanced by SAC land sale. MMC’s reported 4QFY16 PATAMI of RM267m which was boosted by the sale of land at its Senai Airport City (SAC), translating into a gain of RM154m. Recall that MMC had sold 3 parcels of land measuring 189 acres for RM370m in 2015 to the AME Group. Without the sale of land, MMC’s PATAMI would be RM94m bringing full year FY16 Core PATAMI to RM312m which is in line with estimates, represents 98% of our full year forecast.

PTP to recover in 2017. FY16 revenue and PBT for the ports segment rose +43%yoy and +23%yoy respectively with full consolidation of NCB. Without the contribution from NCB, PBT as lower -13%yoy due to lower throughput volume at PTP (-9%yoy) and lower liquid bulk volume at Johor Port (-4%yoy). PTP faced a glitch in port efficiency in 2016 due to a shortage of foreign workers which has since been resolved. Moving forward, PTP should recover as it had benefitted from a reshuffle in port alliances having secured 4 port calls from the Ocean Alliance and an additional weekly call to 12 calls by the 2M Alliance which hubs at PTP.

Good performance by Gas Malaysia supported the energy segment. Malakoff recorded a -21%yoy decline in PATMI as it was hit by 1) additional depreciation for its gas-fired power plants (GB3, Prai and SEV), 2) lower tariffs from Port Dickson Power due to extended PPA and 3) higher maintenance costs. However, the decline in PATMI for the segment was stemmed by Gas Malaysia which saw a +56%yoy rise in its bottom line thanks to an increase in volume sold, higher tolling fees and lower operating expenses.

The engineering and construction (E&C) segment in full swing. Full year PBT increased by +94%yoy with higher progress billings recorded for the Langat 2 and Rapid Cogen projects. In addition, an absence in litigations expenses on SMART and Meena Plaza propelled PBT. We continue to be sanguine on the E&C segment with the KVMRT2 and Pan Borneo Sabah projects providing future earnings visibility.

Maintain BUY with higher TP of RM2.98 (from: RM2.94). We increase our SOP derived TP to RM2.98 (from: RM2.94) as we increase the value of Gas Malaysia with a higher TP ascribed of RM3.33 following the favourable results. 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 and Melaka 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 ~6x FY16 construction revenue.

Source: MIDF Research - 1 Mar 2017