INVESTMENT HIGHLIGHTS

• MMC-Gamuda remain as contractor for MRT2 underground works at a revised cost of RM13.1b

• Pleasantly surprised with the development as the reduction in cost is less than what MoF has proposed

• Revision in MRT underground works contract reduces total construction cost by -22.4%

• Nonetheless, bulk of the group’s earnings will still stem from the port segment

• Maintain BUY with a revised TP of RM1.38 per share

MMC-Gamuda remains as underground MRT2 contractor. The Ministry of Finance (MoF) announced that MMC-Gamuda will remain as the contractor for the underground works but at a lower cost of RM13.1b (- RM3.6b or -21.6%) from RM16.7b previously. On a positive note, this is lower than the RM4.1b-RM5.8b reduction proposed by the MoF based on the study by an independent engineering consultant.

Total MRT2 construction cost reduced by -22.4%. Previously, we exercised conservatism by excluding the outstanding underground works worth approximately RM9.6b which is highlighted in MMC-Gamuda’s media statement dated 8 October 2018. Hence, we are pleasantly surprised with the recent development. Considering the continuation of the underground portion at a lower cost, the overall cost for MRT2 would be lower by - 22.4% to RM30.5b (excluding interest during construction, land acquisition costs and other costs). These final cost savings would translate into lower fares for MRT users which will spur the usage of public transportation in the Klang Valley.

Estimated remaining orderbook stands at approximately RM10b. Taking into consideration the revised value of the MRT2, we estimated that the remaining orderbook of MMC’s construction segment amount to approximately RM10b.

Earnings impact. The continuation of the MRT2 underground works for MMC-Gamuda has prompted us to revise our FY18 and FY19 earnings upwards by 26.1% and 44.4% to RM138.0m and RM230.7m respectively. Note that for FY18, the earnings adjustment was made for 4QFY18 while full contribution of the MRT2 underground works will be reflected from FY19 onwards.

Looking ahead. While the continuation of the MRT2 underground works will provide some cushion to MMC’s earnings, margins of the construction segment will remain under pressure given the challenging environment of the construction sector. We opine that MMC’s profitability to be buttressed by its ports segment as highlighted in our previous note on 26 September 2018. Port of Tanjung Pelepas (PTP) recorded 6.6m TEUs for 9MFY18, reflecting a yearly growth in its container throughput volume for the past five quarters. Meanwhile, Northport and Johor Port has been showing sequential recovery as the side effects of recalibration in shipping alliances start to fade. Moreover, Penang Port will be transitioning into a major port of call for cargo ships from just a feeder port under its RM500m capex plan for the next five years. Growth in Penang Port would also be further supported by the container terminal business but also the cruise terminal operations in collaboration with Royal Caribbean Cruises Ltd driven by the growth in tourism in Penang. Cumulatively, the estimated 12% growth in total revenue of MMC’s ports in FY18 will sustain PAT margins of the segment above 10% and continue to contribute above 50% of earnings in FY18. To recall, MMC is the largest port operating group in Malaysia with a 58% market share of the nation’s container market.

Target price. We are revising our target price upward to RM1.38 per share (previously RM1.32 per share) based on SOP valuation methodology. Note that we also take this opportunity to update our valuation for other construction projects namely i) Langat Sewerage Plant and Pan Borneo Highway in Sabah, and ii) lower acreage of land available for sale in Senai and Tanjung Bin.

Maintain BUY. Our BUY call is mainly anchored on: (i) valuations 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) resilient economic growth in Asia and ASEAN. Key downside risks to our call include: (i) extension of project timeline that may dilute earnings recognition; (ii) weak container volumes of MMC Corp’s ports; and (iii) downward revision of its listed associates.

Source: MIDF Research - 29 Oct 2018