INVESTMENT HIGHLIGHTS

• 1HFY18 earnings below estimates

• However, there is sequential quarter recovery in Northport volume

• Energy segment supported by Gas Malaysia

• Strong orderbook >RM10b for construction segment

• Maintain BUY with a revised TP of RM2.13 per share

Earnings below expectations. For 1HFY18, MMC Corporation Bhd’s (MMC) revenue increased by +32.7%yoy to RM2.5b while its cumulative normalised PATAMI declined by -61.9%yoy to RM46.2m which missed both ours and consensus estimates by a variance of more than 10%. The deviation was mainly attributable to the increase in operating expenses and finance costs in view of the acquisition of Penang Ports.

Pickup in Northport volume on a sequential quarter basis. 1HFY18 Revenue and PBT for the ports and logistics segment declined by - 1.9%yoy and -43.4%yoy respectively mainly due to the decline in container volume at Northport subsequent to the reshuffling of shipping alliances and lower contribution from RAPID Material Offloading Facilities (RAPID MOLF) at Johor Port. Nonetheless, the growth in container volume in PTP and Johor Port by +6%yoy and +8%yoy in 1HFY18 respectively cushioned the lower volumes handled at Northport.

It is noteworthy that volumes at Northport increased by +5.9%qoq, in line with the effects of the reshuffling of shipping alliances reaching its tail end towards end of 1HFY18. Moving forward, we opine that overall container volume for the segment will be supported by the economic growth in Asia and ASEAN which is expected to remain resilient at +6.5%yoy and +5.3%yoy respectively for 2018 in accordance with the International Monetary Fund’s latest projection.

Energy segment supported by Gas Malaysia Bhd. Malakoff recorded a -47.8%yoy decline in PATAMI for 1HFY18 due to: (i) lower capacity payment recorded by the Segari Energy Ventures (SEV) following the tariff reduction under the extended PPA revision and; (ii) lower fuel margin recorded at Tanjung Bin Power and Tanjung Bin Energy plant . However, the decline in the PATAMI for the segment was partially offset by contribution from Gas Malaysia Berhad (BUY; TP: RM3.50) which posted a +33.4%yoy increase in PATAMI due to the increase in volume of gas sold coupled with higher natural gas tariff.

Earnings visibility in construction segment. PBT for engineering and construction (E&C) posted a staggering +78.8%yoy increase in 1HFY18. The substantial gain was largely attributed to the higher progress billings from the KVMRT2 and the Langat Sewerage Treatment projects. Despite big ticket projects being put on the back burner, we remain sanguine on the E&C segment as earnings visibility will be provided by MMC Corp’s role as a PDP in the Pan Borneo Highway in addition to the KVMRT2 and Langat Sewerage Treatment projects. The segment currently has an orderbook of around RM15b which is 12x the construction revenue recorded in FY17.

Earnings forecast. We are revising our FY18 and FY19 earnings forecast downwards to RM292.0m and RM352.1m respectively. This is after inputting: (i) higher estimates for operating expenses and finance costs related to the acquisition of Penang Ports; and (ii) slight reduction in total container volume forecast.

Maintain BUY with adjusted TP of RM2.13 per share (from RM2.29 per share), based on our sum-of-parts (SOP) valuation. Subsequent to our earnings revisions, we tweaked our SOP valuation to incorporate: (i) a higher WACC of 8.5% for MMC’s ports to take into account the impact from the global trade wars; and (ii) a lower target PER to 8x to reflect the possible lack of big ticket projects moving forward. Our BUY call is mainly predicated on: (i) valuation which is supported by the market capitalisation of its listed associates; Malakoff and Gas Malaysia; (ii) synergies from the full acquisition of Penang Ports propelled by economic activity at the northern region of Malaysia and; (iii) healthy orderbook above RM10b for the engineering and construction segment. Key downside risks to our call include: (i) further cancellation or reduction in value of construction projects; (ii) weak container volumes of MMC Corp’s ports; and (iii) downward revision of its listed associates.

Source: MIDF Research - 27 Aug 2018