INVESTMENT HIGHLIGHTS

• Pan Borneo Highway PDP Sabah portion terminated

• Construction orderbook reduced to around RM9.5b following termination of Pan Borneo Highway PDP.

• 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

• Earnings forecast for FY19 and FY20 adjusted downwards

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

PBH PDP terminated. Borneo Highway PDP Sdn Bhd ("BHP"), a 20% MMC owned company, had on 22 April 2019 been terminated as the Project Delivery Partner Agreement for the Pan Borneo Highway. The termination is on the ground of national interest and is to take effect on the expiry of five months from 22 April 2019. However, in terms of progress billing, we opine that it will possibly end three to four months after the said date to enable the handover of construction works.

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.

Impact on construction orderbook. Following the removal of PBH, MMC Corp’s orderbook will decline from RM11.0b as of 31 December 2018 to around RM9.0b. While there is an opportunity for MMC Corp to bid as a contractor under the new model of PBH, we opine that chances are slim for MMC Corp under the possible new turnkey model under which the Federal Government will be giving contracts to the Sabah state government to manage.

Filling in the gap. While the termination of the PBH PDP puts a dent on its construction orderbook, 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 RM9.0b under the absence of PBH is nearly 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’ (PTP) role as a transhipment hub would not be directly susceptible should the trade spat between U.S and China worsen as it mainly caters for intra-Asia trade lanes. Moreover, the impending IMO 2020 sulphur cap in January next year could spur support for the transhipment volumes especially at PTP as shipping liners want to mitigate higher operating expenses from more expensive fuel.

Earnings forecast. Taking into consideration of the termination of the PBH PDP, we are adjusting our earnings forecast downwards for FY19 and FY20 by 3.3% and 4.8% respectively. Previously, we have highlighted the possible effects of the PBH PDP termination in our report dated 21st March 2019.

Target price. As we exclude the PBH project in our sum-of-parts valuation, our TP is adjusted lower to RM1.37 per share (previously RM1.39 per share).

Maintain BUY. Due to the limited downside risk following the termination of PBH PDP we are maintaining our BUY call on MMC Corp. 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. Moreover, we are confident that MMC Corp will clinch new construction projects which will act as a buffer for its construction orderbook. 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 - 30 Apr 2019