INVESTMENT HIGHLIGHTS

• MOF Inc offers RM30m to acquire SMART

• Neutral on the acquisition of SMART by MOF Inc. The price tag of RM30m for MMC Corp’s portion of SMART is lower than the book value of SMART amounting to RM95.1m

• Nevertheless, we opine that the disposal would enable MMC to redistribute the gains for its other business segments

• Remain optimistic on MMC Corp’s ports and logistics segment

• Maintain BUY with an unchanged TP of RM1.31 per share

MOF Inc offers RM30m to acquire SMART. MMC Corp’s JV company with Gamuda, Projek SMART Holdings Sdn Bhd (Projek SMART) on 21 June 2019 received a Letter of Offer from the Ministry of Finance Incorporated (MOF Inc) in respect to acquire Syarikat Mengurus Air Banjir dan Terowong Sdn Bhd (SMART) for an enterprise value (EV) of RM369.0m. Referring to the announcement by Gamuda, Gamuda anticipates that the equity values for its highway concessions (premised on the aforesaid enterprise value and indebted as at completion combined with normal operating conditions including the receipt of all receivables due under the concession agreements) to be:

Rationale of acquisition by the Government. The acquisition of SMART in addition to KESAS, LDP and SPRINT by MOF Inc will prevent compensations of more than RM5.30b due to the freezing of toll rate hikes. Under the new congestion charge system that was previously announced, commuters using these four highways is expected to save as much as RM180 million per annum.

Valuation wise. We are neutral on the disposal of SMART to MOF Inc. The price tag of RM30m for MMC Corp’s portion of SMART is lower than the book value of SMART amounting to RM95.1m (a 69.0% discount). It is also lower than our DCF valuation of MMC’s stake in SMART which is RM249.3m. However, it is a non-core asset for MMC and it has not recorded a profit in the past three years. Moreover, we opine that the disposal would enable MMC to redistribute the proceeds for its other business segments.

Downside risk to traffic outlook for SMART. The average weekday tollable traffic volume plying through SMART has been on the downtrend since FY15 following the toll hike in October 2015. We expect growth in traffic volume to remain muted as the ridership of public transportation such especially LRT (Star and Putra), KTM Commuters and KVMRT Line 1 has been on an upward trajectory. The introduction of the unlimited monthly pass called My100 and My50 will further encourage the use of public transportation in the near term. On a longer term, the completion of KVMRT Line 2 in 2022 which connects Sungai Buloh, Serdang and Putrajaya combined with the possibility of KVMRT Line 3 to be reinstated will exacerbate the risk downside risk on tollable traffic volume.

MMC’s port segment will still be the main driver. We remain optimistic on MMC Corp’s main business segments especially its ports and logistics segment. Despite the ongoing global trade dispute, container throughput at MMC Corp’s ports is expected to remain strong as the trade war forces manufacturing to shift from China would transform Southeast Asian countries such as Malaysia, Thailand, Vietnam and Cambodia into alternative hubs. Meanwhile, MMC Corp’s largest port, Port of Tanjung Pelepas (PTP) will be shielded from any possible recalibration in shipping alliances as APM Terminal, the terminal operating arm of Maersk has a 30% stake in PTP. As such, we are ascribing a lower WACC of 11.0% (from 12.0%) in our DCF valuation for MMC Corp’s ports under our SOP valuation.

Target price. Post-valuation adjustment, our SOP-based TP remains unchanged of RM1.31 per share. This is due to the fact that we estimated the impact of the disposal of SMART is a reduction of -8sen per share to our target price. This will moderate the increase in valuation for MMC Corp’s ports.

Maintain BUY with a revised TP of RM1.31 per share. We believe that there is a high likelihood that MOF Inc’s SMART acquisition will go through. Furthermore, the disposal will not have a significant impact to MMC Corp’s overall earnings. Hence, we are removing the valuation of SMART from our SOP valuation. However, the reduction of -8sen per share to our target price is moderated by the increase in the valuation of ports and logistics business. All-in, we maintain our BUY call with an unchanged target price of RM1.31 per share 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., 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 - 24 Jun 2019