KEY INVESTMENT HIGHLIGHTS

• JV company with Sedia Engineering works appointed as contractor for pipeline project by PETRONAS Gas Berhad for a contract worth RM131.4m

• Minimal impact to earnings assuming construction margins of 10.0%

• Contract value only 1.6% of latest construction orderbook of circa RM7.2b

• Nevertheless this signifies MMC Corp’s ongoing initiatives to replenish its construction orderbook

• Earnings estimates unchanged as impact is immaterial

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

Contract award MMC Corp accepted the letter of award from PETRONAS Gas Berhad appointing the JV company, MMC Engineering & Construction Sdn Bhd (“MMCEC”) - MMC Oil & Gas Engineering Sdn Bhd (“MMCOG”) - Sedia Engineering Works Sdn Bhd Joint Venture (“MMCECMMCOG-SEW JV”) as the contractor for the Engineering, Procurement, Construction and Commissioning (also known as EPCC) of the PGU-I Gas Pipeline Replacement Project (GRAPHITE) (“the Project”) for a contract price of approximately RM131.4m. The last time MMC Corp was awarded with a project related to pipeline construction was in the 1990s.

Financial impact towards MMC Corp. The Project comprises the NPS 36 pipeline and associated station works for the total length of approximately 33km from the Gas Processing Kertih, Kemaman, Terengganu Darul Iman to Bukit Anak Dara Kijal, Kemaman, Terengganu Darul Iman. The Project is expected to be completed within 35 months from December this year. Assuming normal construction project PBT margins of 10.0% and accounting for MMC Corp’s 90% share of the JV company represented by MMCEC and MMCOG, the impact is immaterial for FY19E as expected PBT would be around RM0.3m (less than 0.5% of FY19E PBT). Even for FY20F and FY21F, we are estimating an annual earnings accretion of around RM4.1m which is relatively minimal, making up less than 1.5% of the forecasted PBT in those years. The attributable contract value to MMC Corp can be considered insignificant compared to the construction orderbook of circa RM7.2b.

Our view. While the earnings accretion is very minimal from the awarded contract, we view this award as MMC Corp’s ongoing efforts to ensure a sustainable construction orderbook. Recall that MMC Corp 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 promote 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. As such, we believe that this could provide earnings visibility for the segment as the KVMRT2 reaches completion in 2022.

Earnings estimates. We are revising our FY20F and FY21F earnings upwards by +1.3 and +1.1%% to RM247.4m and RM289.8m respectively after imputing the earnings accretion from the contract. Meanwhile we are leaving our FY19E earnings unchanged due to the immaterial impact for that year.

Source: MIDF Research - 9 Dec 2019