INVESTMENT HIGHLIGHTS

• 1HFY19 earnings within estimates

• Ports and logistics segment supported container throughput growth in PTP and lower operating cost at JPB and Northport

• Minimal disruption to earnings in energy and utilities moving forward backed by acquisition of Alam Flora and MSCSB

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

• Earnings estimates unchanged

• Maintain BUY with a revised TP of RM1.30 per share

Earnings within expectations. In 2QFY19, normalised earnings of MMC Corporation Berhad (MMC Corp) rose by more than +100%yoy to RM50.8m. This brings MMC Corp’s 1HFY19 normalised earnings to RM104.3m (>+100%yoy) which met ours and consensus’ full year estimates at 46.0% and 50.0% respectively.

Higher volumes at PTP and lower cost boosted ports performance. 1HFY19 Revenue and PBT for the ports and logistics segment increased by +13.4%yoy and +62.8%yoy. Performance of the segment was underpinned by the +5.0%yoy increase in container throughput at Port of Tanjung Pelepas (PTP) and better cost management at Johor Port (JPB) and Northport in 1HFY19. This helped offset the small decline in container throughput at Penang Port (PPSB) and Northport during the same period.

Steady performance in energy and utilities. Malakoff Corporation Berhad (Malakoff) (NON-RATED) recorded a +7.7%yoy increase in PATAMI for 1HFY19 due to: (i) improved contribution from Tanjung Bin Energy coal plan given the shorter plant outage duration, (ii) lower barging and demurrage costs following timely completion of coal unloading jetty; and (iii) lower net finance costs. Meanwhile, Gas Malaysia Berhad (BUY; TP: RM3.11) posted a +2.1%yoy increase in PATAMI due to the increase in volume of gas sold coupled with higher natural gas tariff.

Earnings visibility in construction segment. PBT for engineering and construction (E&C) posted a -23.0%yoy decline in 1HFY19 as expected. The drop was largely attributable to the: (i) value revision of the KVMRT2 contract in November 2018 and (ii) lower contribution from the KVMRT2 project and Langat Sewerage Project. The segment’s orderbook stood around RM8.0b as of 30 June 2019 which is 5x the construction revenue recorded in FY17. 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.

Outlook. Moving forward, we note that Port of Tanjung Pelepas’s (PTP) role as a transhipment hub would not be directly susceptible to the trade war between U.S and China as it mainly caters for intra-Asia trade lanes. Moreover, the impending IMO 2020 sulphur cap in January next year could spur support the transhipment volumes especially at PTP as shipping liners will want to mitigate higher operating expenses from more expensive fuel. For energy and utilities, the acquisition of Alam Flora and Malaysia Shoaiba Consortium Sdn Bhd (MSCSB) by Malakoff would better address the potential earnings gap from the expiry of the power purchase agreement for Kapar Energy Ventures and PD Power. The reason being is that the 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%. Meanwhile, 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.

Earnings forecast. No changes to our earnings forecast as earnings came within expectations.

Target price. While our earnings are unchanged, we are revising our target price to RM1.30 per share (previously RM1.31 per share) to reflect change of the consensus target price for Malakoff and our fair value of Gas Malaysia. Our target price is based on sum-of-the-parts valuation.

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. All factors considered, we reiterate out BUY call on MMC Corp with a revised target price of RM1.30 per share.

Source: MIDF Research - 28 Aug 2019