INVESTMENT HIGHLIGHTS

• 1QFY19 normalised earnings well within expectations

• PTP continues to be contributor of ports and logistics segment despite MFRS 16 adoption

• Improvement seen in performance of listed associates

• Engineering and construction segment experienced a blip due to KVMRT2 contract value revision

• Earnings forecast maintained as results met expectations

• Maintain BUY with a revised TP of RM1.31 per share as we roll forward our valuation base year

Earnings met expectations. MMC Corp’s 1QFY19 normalised PATAMI surged by more than +50%yoy to RM53.5m with better cost management being one of the factors for the substantial growth in the quarter under review. The results met ours and consensus’ expectations, accounting for 23.5% and 21.6% of full year forecasts, respectively.

PTP continues to be one of the growth factors for ports and logistics segment. The revenue and PBT of the ports and logistics segment in 1QFY19 grew by +19.1%yoy and +55.2%yoy respectively. Much of the container throughput growth came from Port of Tanjung Pelepas (PTP) and Johor Port (JPB), both growing by more than +2.0%yoy. In addition, the full consolidation of Penang Port’s (PPSB) revenue boosted the segment’s performance. All of these factors helped offset the effects of higher finance costs and depreciation following the adoption of MFRS16 standard on “leases”.

Both of its listed associates recorded improvements. Malakoff recorded a +26.6%yoy increase in PATAMI due to; (i) improved contribution from Tanjung Bin Energy coal plant with the absence of unplanned plant outages. Its other listed associate, Gas Malaysia Berhad (BUY; TP: RM3.50) remained strong, posting +2.4%yoy increase in PATAMI due to the increase in volume of gas sold coupled with higher natural gas tariff.

Actively bidding for construction projects. Meanwhile, PBT for engineering and construction (E&C) posted a decline of -33.8%yoy in 1QFY19. The yearly drop was largely attributable to the value revision of the KVMRT2 contract from RM16.7b to RM13.1b in November 2018. However, 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 its construction orderbook as of 31 March 2019 stood around RM9.0b (excluding Pan Borneo Highway) which is nearly 5.0x the construction revenue in FY18.

Earnings forecast. As earnings were in line with our expectations, we are making no adjustments to our FY19 and FY20 forecasts.

Target price. While our earnings are unchanged, we are revising our target price to RM1.31 per share (previously RM1.37 per share) from as we roll forward our valuation base year to FY20. The lower target price is due to the majority of components in our sum-of-parts valuation, mainly ports and logistics which is valued using a discounted cash flow methodology. The change in target price also follows the change of the consensus target price for Malakoff Berhad.

Maintain BUY. 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., which will be driven by the growth in tourism in Penang. Moreover, we are confident that MMC Corp will be able to clinch new construction projects which will act as a buffer for its construction orderbook. Other catalysts for MMC Corp include the possible reinstatement of the KVMRT3 project at a revised cost (possibly half the original price tag of RM45b). Key downside risks to our call include: (i) prolonged global trade tensions; (ii) weak container volumes of MMC Corp’s ports; and (iii) downward revision of its listed associates.

Source: MIDF Research - 29 May 2019