INVESTMENT HIGHLIGHTS

• MMC is acquiring the remaining 51% stake in Penang Port

• The company is paying slightly higher for full control

• Penang Port is the third largest port in Malaysia by volume

• MOU with Sime Darby and Adani Group for the development of Pulau Carey Port

• Maintain BUY with TP of RM2.98

Acquiring the remaining 51% stake in Penang Port. This comes after both MMC and the vendor, Seaport Terminal (Johore) Sdn Bhd (Seaport) agreed to enter into a supplementary agreement altering the condition precedent of disposing the ferry business into a condition to be fulfilled subsequently. Recall that MMC had in August 2016 purchased a 49% stake in Penang Port for RM200m from Seaport which is also MMC’s largest shareholder.

Paying slightly higher for full control. The transaction for the remaining 51% stake will be valued at RM220m, which is higher considering that 1) Unaudited PBT for FY16 increased +46%yoy, 2) MMC will no longer be under pressure to dispose of the ferry business to conclude the deal and 3) the remaining stake gives MMC full control of the port. This values Penang Port at RM431m which is a price-to-earnings multiple of 30x. However, stripping off losses from the ferry business which could be between RM15-RM20, PE multiple could be at a more palatable 12-15x.

Penang Port is the third largest port in Malaysia by volume, trailing only Port Klang and Port of Tanjung Pelepas having handled 1.4m TEU in 2016, a growth of +8%yoy attributed to the robust E&E sector for exports and hinterland consumption growth for imports. In addition, Penang Port is predominantly a gateway cargo port with 93% of containers made out of the higher yielding gateway cargo. With the acquisition, MMC would have a ‘Port-folio’ of 5 assets namely Penang Port (northern region), Northport (central region), Johor Port, Port of Tanjung Pelepas and Melaka Port in the southern region. In our view, MMC’s planned listing of its port assets in 2018 is increasingly attractive given the potential synergies which can be extracted from having multiple ports.

MOU with Sime Darby and Adani Ports to explore the development of Pulau Carey. While the news does not come as a surprise to us as MMC’s CEO, Datuk Seri Che Khalib had previously stated MMC’s interest in the project, the scale of the project with a total GDV of US$32b (RM142b) with strong partners being roped in could generate higher investor interest in MMC Ports. However, we have not factored in any potential benefits from the project as it is currently in the exploration stage.

Maintain BUY with unchanged TP of RM2.98. Our SOP derived target price is unchanged as we value the ports at the purchase price and assume a similar increase in debt to fund the purchase. Meanwhile, our earnings forecast is unchanged as well as the acquisition is targeted to be complete in 4QFY17 with minimal earnings contribution following an increase in interest expenses. 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 Pulau Carey Port, Penang Port and Melaka Port sweetening the deal, 2) Steady performance by the energy segment, and 3) Healthy order book for the construction segment of >RM9b which translates into ~6x FY16 construction revenue.

Source: MIDF Research - 4 Apr 2017