INVESTMENT HIGHLIGHTS

• MMC Corp’s 2QFY19 earnings expected to be higher on a yearly and sequential basis

• Growth in MMC Corp’s container throughput especially at PTP will continue to propel earnings

• Earnings visibility for engineering and construction to remain intact as the company continues to actively bid for new projects

• Minimal disruption to potential earnings gap supported by acquisition of Alam Flora and MSCSB

• Not discounting possibility of land sale at Senai Airport City in the next few years due to limited land availability in Singapore

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

Earnings expected to be higher yearly and sequentially. We believe that MMC Corp’s 2QFY19 normalised profit will be between RM55- 60m. This would represent increases of approximately +10.0%yoy and +3.0%qoq. We are anticipating a rebound in earnings this year buttressed by growth in container throughput from its stable of ports.

PTP expected to be main contributor of overall container throughput growth. Overall, container throughput for MMC Corp’s ports is expected to be higher as Malaysia’s leading economic index is still pointing towards a path of recovery. This also suggests that the GDP growth for 2Q19 may be higher than 1Q19 backed by the exports growth in 2Q19 of +4.0%qoq. Bulk of the growth in container throughput will be underpinned by Port of Tanjung Pelepas (PTP) which constitutes around 60% of MMC Corp’s total container throughput. Based on data from the Johor Port Authority, PTP grew at a tune of approximately +6.0%qoq and +7.0%yoy to reach around 2.36m TEUs. Moreover, the fact that Maersk owns 30% of PTP would shield the port from any effects of reshuffling of alliances seen in Port Klang during FY17.

Concerns from trade war negated by resilient demand. We opine that impact from the ongoing trade war between the U.S and China to be muted on MMC Corp’s ports. This is predicated by resilient demand in both China and the U.S (indicated by retail sales and business confidence despite the ongoing trade tensions between both nations). Such trade disputes may continue prompting companies especially in China to relocate their business hubs to ASEAN, benefitting countries such as Malaysia. It is also worthwhile to note that the percentage of contribution from U.S and China have been increasing slightly thus far this year despite the occurrence of the U.S-China trade war (refer to Table 1). Meanwhile, Malaysia’s trade contribution from ASEAN remains robust at 26.8% in 6MFY19 which corroborates with IMF’s 2019 economic growth projection for ASEAN of 5.0%.

Earnings visibility in engineering and construction to remain intact. Looking ahead, the company is actively bidding for a few marine infrastructure related projects with a price tag of RM300-500m. As, such we believe that this could provide earnings visibility for the segment as the KVMRT2 reaches completion in 2022.

Energy and utilities outlook. For its associate company, Malakoff Corporation Berhad (NON-RATED) we gathered that the power purchase agreement(PPA) for the loss-making Kapar Energy Ventures (KEV) will expire by the end of this year. Henceforth, we believe that there will be minimal earnings disruption to Malakoff following the completion of the acquisition of Alam Flora. Performance of Alam Flora has been commendable in the past few years with a 5-year PBT CAGR of 12.0% and PBT margins remaining above 10.0%. The completion of the acquisition is expected to be completed around 4QFY19 following the extension of fulfilling the conditions precedent of the Share Sale Agreement (SSA) to 31 January 2020 from 31 July 2019 pending approvals from authorities. Meanwhile, the acquisition of Khazanah Nasional Berhad’s 40% stake in Malaysian Shoaiba Consortium Sdn Bhd (MSCSB) for USD70m (or RM288m) by Malakoff would also better address the potential earnings gap. Earnings accretion to Malakoff are expected to be derived from remaining contract periods of approximately 10 years under Shuaibah Water & Electricity Co. Ltd’s (SWEC) Power and Water Purchase Agreement(PWPA) and Shuaibah Expansion Project Company Limited(SEPCO’s) Water Purchase Agreement indirectly owned by MSCSB.

As for Gas Malaysia Berhad (BUY; TP:RM3.50), we reiterate our view that we opine gas sales volume for FY19 will continue to sustain and register year-over-year growth. Our current gas volume growth projection remains between 6-6.5% similar to that of FY18. Our assumption is premised on resilient national GDP growth of 4.5-4.7% for 2019. Moving forward, we believe that the growth the gas sales volume will be primarily driven by rubber, oleochemical, consumer products and glass manufacturing industry supported by 2019 GDP growth of about 4.5-4.7%.

Potential recurrence of sale of land. To recap, MMC Corp had started its Senai Airport City (SAC) not too long ago. The last sale of land took place in August 2015 whereby three parcels of land totalling 188.7 acres (76.4ha) was sold to I-Park Sdn Bhd for RM370.0m cash, a price that is more than double its original purchase price of RM140.5m. Other occupants/tenants of the SAC include Fuji Oil, Hershey’s Chocolate and EcoWorld. We do not discount the possibility of the potential land sale to take place in the coming years due to the limited land availability in Singapore, prompting businesses to shift part of their distribution or manufacturing hubs to SAC.

Earnings forecast. No changes to our earnings forecast.

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. 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). 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. 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 - 13 Aug 2019