INVESTMENT HIGHLIGHTS

• 1QFY18 earnings below estimates

• Temporary blip in Northport’s volume

• Energy segment supported by Gas Malaysia

• Earnings visibility in the coming years for construction segment

• Maintain BUY with adjusted TP of RM2.29 per share

Earnings below expectations. MMC Corp registered 1QFY18 normalised PATAMI of RM41.3m (-26.6%yoy) which missed both ours and consensus estimates by a variance of more than 10%.

Reshuffling of alliance affected Northport. FY17 revenue and PBT for the ports and logistics segment declined by -8.1%yoy and -46.0%yoy respectively due to the decline in volume at Northport and lower contribution from RAPID Material Offloading Facilities (RAPID MOLF). The growth in container volume in PTP and Johor Port by +7%yoy and +12%yoy respectively cushioned the lower volumes handled at Northport following the effects of reshuffling of shipping alliances in April 2017 which could last until end of 1HFY18. Henceforth, volume in Northport is expected to pick up thereafter. Moving forward, we opine that overall container volume for the segment will be supported by: (i) resilient Malaysian external trade and; (ii) contribution from Penang Ports which was fully acquired on 1 May 2018.

Energy segment supported by Gas Malaysia. Malakoff recorded a - 46.4%yoy decline in PATAMI due to; (i) lower capacity payment recorded by the SEV after the PPA revision and; (ii) lower fuel margin recorded at Tanjung Bin power plant. However, the decline in the PATAMI for the segment was partially offset by Gas Malaysia Berhad (BUY; TP: RM3.50) which posted a +24.0%yoy increase in PATAMI due to the increase in volume of gas sold coupled with higher natural gas tariff.

Earnings visibility in construction. PBT for engineering and construction (E&C) posted a staggering +184.6%yoy increase in 1QFY18. The substantial gain was largely attributed to the higher progress billings from the KVMRT2 and the Langat Sewerage Projects. Despite a possible delay in MRT3 by the government, 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. The segment currently has an orderbook of around RM15b.

Earnings forecast. We revise our earnings forecast downwards to RM373.5m (previously RM441.5m) and RM438.4m (previously RM525.8m) in FY18 and FY19 respectively. This is to ascribe a lower single digit growth in container volume for Northport amid the recalibration of shipping alliances while imputing a lower perpetual growth of 2.5%(previously 3.0%) across the ports and logistics segment, exercising caution on any trade uncertainty. One of the major risks to earnings especially from the construction segment is the lack of big ticket infrastructure works moving forward.

Maintain BUY with adjusted TP of RM2.29 per share (from RM2.51 per share), based on our sum-of-parts (SOP) valuation. Subsequent to our earnings revisions, we tweaked our SOP valuation to incorporate lower perpetual growth of 2.5% for MMC’s ports. Our BUY call is mainly predicated on: (i) potential listing of its ports assets; (ii) contribution from the full acquisition of Penang Ports and; (iii) healthy orderbook above RM10b for the engineering and construction segment.

Source: MIDF Research - 30 May 2018