INVESTMENT HIGHLIGHTS

• Possible takeover of PBH by the government

• Risk lies in the not being shortlisted under the turnkey model

• Orderbook will be reduced to around RM9.5b if MMC Corp not reappointed as contractor under turnkey model

• MMC Corp aims to clinch 1-2 construction projects per year with an individual value ranging from RM250m to RM500m

• MMC’s ports to remain a strong contributor especially PTP

• Downside risk limited. Maintain BUY with an unchanged TP of RM1.37 per share

Shifting towards turnkey from PFP model. According to a media statement by The Edge Financial Daily, the federal government has decided to ditch the project delivery partner model (PDP) model for the entire RM29b Pan Borneo Highway (PBH) in favour of a turnkey contractor model. Meanwhile, Sabah’s infrastructure development ministry is said to have submitted a proposal to take over the implementation of the Sabah portion of PBH according to The Edge Financial Weekly.

Progress of PBH so far. In terms of progress, the Sabah Portion in had reached 12.4% completion with a cost of RM609m as of February 2019. MMC Corp’s exposure in PBH is seen through its effective 20% stake in Borneo Highway PDP Sdn Bhd.

Potential earnings impact. According to media reports, the federal and Sabah state governments are now studying the execution mechanism of the highway project, and the cabinet to decide on its future direction by end-March. Assuming that MMC Corp would not be re-appointed as the contractor under the turnkey model and with the new model being implemented in May 2019, the construction orderbook will decline from RM11.0b as of 31 Dec 2018 to around RM9.5b. Based on our preliminary analysis, overall earnings of MMC Corp could decline by approximately 3.2% and 5.1% in FY19 and FY20 respectively.

Would there be a second chance for the JV Co? We are also not ruling out the possibility of UEM and MMC to participate in the retendering process. Assuming that both entities are able to reduce cost, we believe the outcome will be positive. This is taking into consideration the JV Co initial involvement in the project and the competitive cost advantage it is able to achieve, in comparison to potential tender bids by other contractors.

Filling in the gap. While the possibility of MMC Corp to be no longer involved in PBH poses a risk on earnings, we understand that the company is actively bidding for a few large scale infrastructure projects which could act as a buffer for its construction orderbook. The target is one to two projects a year with an individual value ranging from RM250m to RM500m. It is also notable that the estimated orderbook of around RM9.5b under the absence of PBH is 5.0x the construction revenue in FY18.

Other underpinning factors. In the near-term, we also expect the ports and logistics segment to benefit from the Penang Port’s full year contribution underpinned by economic activity in the Northern region of Peninsular Malaysia. We also note that Port of Tanjung Pelepas’s (PTP) role as a transhipment hub would not be directly susceptible under a full blown trade war between U.S and China as it mainly caters for intra-Asia trade lanes. Moreover, the impending IMO 2020 sulphur cup in January next year could spur support the transhipment volumes especially at PTP as shipping liners want to mitigate higher operating expenses from more expensive fuel.

Earnings forecast. We make no changes to our earnings forecast pending further clarity on the matter.

Maintain BUY. Should MMC Corp does not become involve in the PBH, we estimate that it will have the potential to reduce our TP by -3sen per share. However, the potentially reduced TP would still constitute a BUY call. Hence, we believe that the downside risk to this is limited. Therefore, we maintain our BUY call with an unchanged target price of RM1.37 based on sum-of-parts valuation. We continue to favour MMC Corp due to the: (i) valuations supported by the market capitalisation of its listed associates; Malakoff and Gas Malaysia; and (ii) synergies from the full acquisition of Penang Ports supported by the container terminal business and the cruise terminal operations in collaboration with Royal Caribbean Cruises Ltd driven by the growth in tourism in Penang. Key downside risks to our call include: (i) further 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 - 22 Mar 2019