KEY INVESTMENT HIGHLIGHTS

• MMC Corp’s 9MFY19 earnings expected to be higher

• Overall container throughput to continue growing despite trade headwinds.

• Actively proposing railway related projects to several state governments for its engineering segment

• Minimal disruption to potential earnings gap supported by acquisition of Alam Flora and disposal of MacArthur Wind Farm

• Earnings estimates unchanged

• Maintain BUY with an unchanged TP of RM1.30 per share

9MFY19 earnings expected to be higher. We believe that MMC Corp’s 9MFY19 normalised profit will be between RM110-140m. This would represent increases of approximately more than +30%yoy growth. We reiterate that there will be a rebound in earnings this year buttressed by growth in container throughput from its stable of ports.

Overall container throughput to continue growing despite trade headwinds. Overall, container throughput for MMC Corp’s ports is expected to be higher despite a slowdown in Malaysia’s trade. The reason being is that the contraction in Malaysia’s trade figures for 3QFY19 were caused mainly by E&E exports (-4.9%yoy) which are normally transported via air freight. In contrast, we believe that seaborne trade will remain resilient compared to air trade, in line with DHL’s Global Trade Barometer (refer to Table 1). Moreover on a broader scale, 4QFY19 started on a positive note with Malaysia’s manufacturing Purchasing Managers’ Index climbing to 49.3 in October 2019, the highest in six months partly attributable to trade diversion.

Throughput growth underpinned by PTP. 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 +3.0%yoy to reach around 6.76m TEUs in 9MFY19. This constitutes roughly 72.0% of our full year FY19 container throughput forecast of 9.41m TEUs for PTP. 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.

Outlook for MMC’s Ports. In the long run, we opine that the development of free industrial zones (FIZ) in Malaysia to continue supporting local cargo growth for MMC Corp’s ports. For instance, around 1,000 acres of land in PTP has been allocated for the PTP Free Zone. PTP is expected to expand into phase 3 of the free zone with a size 168 acres. The tenure of the lease agreement with companies setting up warehouses usually lasts for 30 years with an agreement to commit to a certain level of container throughput. We opine that the development of the free trade zones could attract more MNCs (especially from Singapore) to shift its warehouse operations to PTP and eventually this will also include container volume. Notable occupants include the Volkswagen Regional Parts centre that commenced operations in October 2018, occupying 0.6m sq ft. Other upcoming FIZs include the Kota Perdana Special Border Economic Zone at Bukit Kayu Hitam whereby 100 out of the 4,395 acres have been earmarked for the development of a logistics hub to strengthen trade relations with Thailand. As such, we believe that the commencement of the 24 hour operations of the Immigration, Customs, Quarantine and Security (ICQS) Bukit Kayu Hitam and Customs, Immigration and Quarantine (CIQ) Sadao will promote better cargo flow especially from Thailand to MMC Corp’s Penang Port. Overall, ample land space and direct connection to the port terminal also provide efficient and cost-effective container movement between the Free Zone and the port, creating convenience for the container trade.

Earnings visibility in engineering and construction to remain intact. Looking ahead, we gathered that the company is actively proposing a few railway related projects to several state governments. MMC Corp has also put forward alternative solutions for the proposed railway projects which promotes better cost efficiency and reducing total cost of ownership by one third of the normal cost. This is in addition to the submitted proposal to revise the MRT3 project at a price tag lower than RM45.0b to the government in December 2018. Any plans to revive the MRT3 project would be a huge boost to its construction orderbook.

Higher gas sales volume to maintain Gas Malaysia’s earnings growth. MMC Corp’s 30.9% owned listed associate, Gas Malaysia Berhad (BUY; TP:RM3.11) recorded a profit after tax of RM132.2m (+2.2%yoy) due to higher volume of natural gas sold and higher natural gas tariff. We believe that gas sales volume for FY19 to continue to be sustained with a growth range of 5.0% to 5.5%. Management has also guided that FY20 will see growth coming from the increase in volume of gas sold in line with recently acquired customers primarily from rubber, oleo-chemical, consumer products and glass manufacturing industries.

Potential earnings gap to be well addressed by Malakoff. Meanwhile, we believe that there will be minimal earnings disruption to Malakoff Corporation Berhad (NON-RATED) following the expiration of its power purchase agreement (PPA) for Kapar Energy Ventures by the end of FY19. This is due the acquisition of Alam Flora by Malakoff. 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. The expected net gain disposal on Malakoff’s 50% stake in MacArthur Wind Farm of RM546m (expected completion in 1QFY20) could be channelled to firm up Alam Flora’s operations or Malakoff’s existing business segments. Furthermore, 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. Post-acquisition, Malakoff’s indirect stake in MSCSB via Malakoff Gulf Limited will be increased to 80% from 40%, enabling Malakoff to recognise higher share of profit 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. All in, Malakoff’s total effective generation capacity for power and water will increase to 6,708MW and 544,375 m3/day respectively from the existing 6,600MW and 420,925 m3/day.

Prospective recurrence of sale of land at SAC. To recap, MMC Corp had started its Senai Airport City (SAC) (2,104 acres of industrial land) not too long ago. The last major 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/lease 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. The growth in Malaysia aerospace industry would be another catalyst for SAC in terms of maintenance, repair and Overhaul (MRO) activities. Throughout 2019 to 2029, narrowbodies are expected to make up the majority of MRO market share at more than 50%, followed by widebodies, regional jets and turboprops. The trend for narrowbodies is already prevalent in ASEAN with AirAsia Group Berhad’s placing more than 200 orders for Airbus' A321neo model, making AirAsia the world's largest customer for the model. Notably, AirAsia’s market share in Senai is more than 50.0%, and hence it would be appropriate for SAC to emerge as an MRO hub for AirAsia.

Earnings estimates. No changes made to our earnings estimates.

Target price. We are maintaining our target price to RM1.30 per share 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 especially in railway 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 our BUY call on MMC Corp with an unchanged target price of RM1.30 per share.

Source: MIDF Research - 18 Nov 2019