INVESTMENT HIGHLIGHTS

• FY17 earnings below estimates

• PTP and Johor Port performed well

• Energy segment supported by Gas Malaysia

• One-off impairments hampered construction division

• Earnings visibility in the coming years

• Maintain BUY with adjusted TP of RM2.72 per share

Earnings below expectations. MMC Corp registered 4QFY17 normalised PATAMI of RM104.8m (-60.8%yoy). This contributed to a FY17 normalised PATAMI of RM254.9m (-47.2%yoy) which missed both ours and consensus estimates, accounting for only 75% of the full year forecasts. The shortfall was mainly due to the completion KVMRT1 line and no sale of land in respect to Senai Airport City (SAC). We also note higher effective tax rate of 46% in 4QFY17 due to under provision of tax in prior years and certain expenses which were not tax deductible.

PTP and Johor Ports performed well. FY17 revenue and PBT for the ports and logistics segment rose +3.0%yoy and +5.9%yoy respectively due to higher container volume at PTP and Johor Ports. The growth in container volume especially in PTP cushioned the lower volumes handled at Northport following the effects of reshuffling of shipping alliances in April 2017. To recall, PTP is the key regional hub for the 2M Alliance with 12 weekly calls while the Ocean Alliance has four weekly calls at PTP. Moving forward, we opine that overall container volume for the segment will be supported by: (i) higher Malaysian external trade and; (ii) acquisition of the remaining 51% stake in Penang Ports this year.

Energy segment supported by Gas Malaysia. Malakoff recorded a - 12.8%yoy decline in PATAMI amid lower capacity payment recorded by the SEV after the PPA revision. However, the decline in the PATAMI for the segment was partially offset by Gas Malaysia Berhad (BUY; TP: RM3.50) which posted a +17.9%yoy increase in PATAMI due to the increase in volume of gas sold coupled with higher natural gas tariff.

Impairments hampered construction division. PBT for engineering and construction (E&C) fell -43.3%yoy in FY17. The substantial decline was largely attributed to the completion of the KVMRT1 line and one-off provision for impairment on SMART due to lower forecasted traffic volume. However, this was cushioned by higher progress billings from the KVMRT2 and the Langat Sewerage Projects. We remain sanguine on E&C segment as earnings visibility will not only be provided by the KVMRT2 but also MMC Corp’s role as a PDP in the Pan Borneo Highway.

Earnings forecast. We revise our earnings forecast upwards to RM441.5m and RM525.8m as we factor in higher volume growth from the ports and logistics division underpinned by the continued strength in Malaysian external trade that is estimated to grow by +9.3%yoy in 2018 according to our economics team.

Earnings visibility moving forward. Once the full acquisition of Penang Ports is completed this year, we estimate revenue contribution of approximately RM500m which will bode well for ports and logistics division. The E&C segment meanwhile has a healthy orderbook of >RM10b which will provide future earnings visibility in the near future.

Maintain BUY with adjusted TP of RM2.72 per share (from 2.67), based on our sum-of-parts (SOP) valuation. Subsequent to our earnings revisions, we tweaked our SOP valuation to incorporate lower WACC of 7% for MMC’s ports amid expected synergies once Penang Ports is fully acquired. Our BUY call is mainly predicated on: (i) potential listing of its ports assets, (ii) expected synergies from the full acquisition of Penang Ports (iii) ongoing projects at the Langat sewerage plant.

Source: MIDF Research - 28 Feb 2018