KEY INVESTMENT HIGHLIGHTS

• 9M20 core PATAMI recorded a growth of +29.0%yoy
• Performance was underpinned by higher container throughput at PTP
• Clear V-shaped recovery of TEU’s volumes after March 2020
• 4Q20 TEU’s traffic is expected to remain elevated
• Countries around the world started to open strategic ports and resume trade activities in earnest
• Revise our earnings estimate for FY20E by +9%
• Maintain BUY with a revised TP of RM1.21 per share

Above expectation. MMC Corp recorded a 3QFY20 core PATAMI of RM56.6m (-27.0%qoq and +51.0%yoy) on the back of a higher revenue recorded at RM1.12b (+13.0%qoq and -10.0%yoy). Cumulatively, its 9MFY20 core PATAMI grew at +29.0%yoy to RM183.1m. This came in as a positive surprise as earnings deviated from ours and consensus expectation by +15.0% and +1.0% respectively.

Buoyed by PTP’s higher volume. On a quarterly sequential basis, top line for ports and logistics improved by +10.0%qoq and +2.0%yoy. However, on cumulative, top line for 9MFY20 saw a slight decline at RM2.33b or -1.0%yoy. This was nonetheless a commendable performance despite the slight decline given the year was fraught with business disruptions. At PBT level, cumulatively for 9MFY20, the segment saw encouraging improvement as PBT increased by +10.0%yoy to RM347.0m. Performance of the segment was underpinned by the resilient container throughput at Port of Tanjung Pelepas (PTP) when compared against other ports that saw lower volume handled throughout the period.

Engineering segment hurt by MCO. For 9MFY20, Engineering and Construction segment recorded a lower revenue of RM811.0m (- 31.0%yoy) and consequently, lower PBT of RM176.0m (-8%yoy). The decline can mainly be attributed to the lower work progress from KVMRT-SSP line which was hindered by movement control order. That said, we are expecting a slight rebound in the segment moving forward as resumption of construction activities gaining momentum by end of 4QFY20.

Clear V-shaped recovery of TEU’s volumes after March 2020. Based on TEU’s data that we have compiled (Figure 1), we can see there is a clear pattern of volume contraction early on during the Covid-19 outbreak. Despite the virus continues to ravage greater part of the globe, we saw a clear V-shaped recovery of TEU’s volumes after March 2020, surpassing the pre-pandemic level. Moving forward, we expect 4Q20 TEU’s traffic to remain elevated as it is traditionally a peak season for ocean freighters. Furthermore, we do not foresee any further trade disruptions as countries around the world started to open strategic ports and resume trade activities in earnest. Consequently, this will also cushion the fall in demand and lend support to ports operators’ earnings such as MMC.

Earnings estimates. Given the positive surprise for the quarter, we are revising our earnings estimate for FY20E from RM211.7m to RM231.7m. This translates to a +9% increases from our previous estimate.

Target price. As adjustments were made to our earnings estimates, we are revising our target price to RM1.21 per share (previously RM1.15) based on sum-of-the-parts valuation.

Maintain BUY. We opine that PTP’s role as a transshipment hub will act as a cushion for other MMC Corp’s ports which rely heavily on gateway containers. Therefore, this will prevent MMC Corp’s overall container throughput from declining by more than -10.0% annually. In addition, we expect MMC Corp’s container throughput to recover in FY21, in line with IMF’s Projection of Malaysia’s GDP growth at 7.8% FY21. Furthermore, with Maersk, the largest container ship operator in the world, owning a 30.0% stake in PTP, we believe that the shipping company will ensure that PTP will remain as its regional transshipment hub, ensuring sustainability of TEU’s volume. Key downside risks to our call include: (i) prolonged Covid-19 outbreak; (ii) weaker than expected 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 a revised target price of RM1.21per share.

Source: MIDF Research - 26 Nov 2020