INVESTMENT HIGHLIGHTS

• Drop in share price not justified

• Expected improvement for ports and logistics

• Plans for Carey Island Ports could be pushed back

• Acquisition of Sabah Ports

• More progress billings at the end of the year

• Upgrade to BUY with unchanged TP of RM2.63

Drop in share price not justified. Lately, the share price of the company has dropped by more than 15% since the beginning of 2H17. We view that the drop in the company’s share price is in the absence of concrete reasons.

Expected improvement for ports and logistics. The ports and logistics segment registered a slight decline in PBT of -2%yoy in 1HFY17. However, we believe that this segment could stage a healthy rebound in 2HFY17. MMC’s 2 largest ports, Johor Port and PTP are likely to record strong container and conventional throughput volume in 2HFY17: The former due to higher demand of conventional cargo at its Johor hinterland, while the latter due to a recovery in 2M alliance volume and new services by the Ocean Alliance.

Plans for Carey Island Ports could be pushed back. To recap, MMC Ports had signed an MOU with Adani Ports and Sime Darby to study the feasibility of constructing a container port in Carey Island back in April. However, the recent announcement by Westports which received an approval-in-principal for an extension of its concession period could temporarily shelve newsflow pertaining to the Carey Island port project. We gather that the overall investment required for the Carey Island port project to be large and spread over a 20-year timeframe. MMC Ports remains keen to participate in the Carey Island Project, but maintained that further clarity would only be available further down the line, perhaps in 2019.

Discussions with Suria Capital to acquire Sabah Ports. MMC announced on Bursa that discussions have taken place with Suria Capital Berhad regarding the potential acquisition of Sabah Ports. We believe that MMC Ports could be seeking a stake in Sabah Ports, to expand its port footprint in East Malaysia where it sees good growth potential. In our opinion, synergies could be derived from this acquisition, provided the acquisition price being attractive.

Engineering and construction in a transient phase. The engineering and construction segment has been in a period of lull as progress billings for MRT1 have come to a tail end while the MRT2 is yet to kick off. We also expect that the MMC’s role as a PDP for the Sabah portion of the Pan Borneo Highway will provide an impetus for this segment moving forward.

Upgrade to BUY with unchanged TP of RM2.63, based on our sum-of-parts (SOP) valuation. We maintain our FY18 and FY19 earnings forecast, with a view that the weak share price could be due to the weaker than expected eanings in 2QFY17. With the key points highlighted above, a sell down is not justified, providing a good buying opportunity.

Source: MIDF Research - 19 Oct 2017