We initiate coverage on MMC with a conviction BUY and SOP-based MYR3.40 TP (94% upside), assuming a 30% holding company discount to its MYR4.86 EV/share. At the current price, the market only ascribes a MYR2.5bn value for all its non-listed businesses (Fig. 2), which implies that investors get MMC Port for free. We see no real reason for thediscount, as earnings prospects of its core businesses are attractive.

Firing on most cylinders. We like MMC Corp (MMC) for its solidfundamentals, attractive earnings prospects and a huge mispricing of its nonlisted assets, in our view. We expect core PATAMI to grow at a CAGR of 48% over FY15-18F (Fig. 1). The key earnings driver is MMC Port Holdings SB (MMC Port), ie the largest local port operator. Its Port of Tanjung Pelepas (PTP)flagship is expected to benefit from the 10-year 2M Alliance, while recentlyacquired NCB Holdings (NCB) should provide steady longer-term growth. We also look forward to the construction wing rebounding on Mass Rapid Transit 2 (MRT2) jobs, potential announcement of the Pan Borneo Highway (Sabah) project delivery partner (PDP) and a purported electrified double-track railproject for freight transport bypassing the Klang Valley.

Ports for free. At the current price, its non-listed businesses’ (NLBs) implied value is MYR2.5bn, which largely explains the value of the non-port NLBs while ascribing negative value to MMC Port. With the latter’s value entirely ignored, investors would essentially get the port assets for free (Fig 2). Contrastingly, the market ascribes a decent value to the NLBs for Sunway (SWB MK, BUY, TP: MYR3.40) and IJM Corp (IJM) (IJM MK, BUY, TP: MYR3.90). The latter’s NLBs explain 90% of its market cap and is valued at 18x FY16F P/E despite its similar business profile to MMC, which is valued at 13.1x FY16F P/E only (Fig 3).

Value-unlocking opportunity. We believe this offers investors the opportunity to benefit from MMC’s value-unlocking exercise, especially with the acquisitionof NCB complementing its ports business. Based on a MYR2.6bn valuation that we ascribed to non-ports NLBs and MYR7.1bn valuation to MMC Port, theintrinsic value could rise by MYR2.1bn-2.8bn (40-53%) to MYR7.4bn-8.2bn. This assumes MMC retains a 30-40% stake in MMC Port (Fig 4).Key risks. MMC’s construction division relies heavily on major projects. Thus, a prolonged crude oil price decline could affect its orderbook. Sluggishdevelopment at Iskandar Malaysia could also affect assets there. Any unscheduled outages at Malakoff Corp (Malakoff) (MLK MK BUY, TP: MYR2.18) may impact associate contributions as well.

Valuing MMC. We value MMC based on SOP. The NLBs are valued at MYR9.7bn, ie MYR7.1bn for MMC Port and MYR2.6bn for the non-port assets –which include construction, Senai International Airport (Senai Airport), the Stormwater Management and Road Tunnel (SMART) concession, and debt and cash at the group level. Its listed assets are valued at MYR5.1bn , based on RHB’s internal valuation, consensus and market prices.

Investment Thesis Why BUY MMC? There are various reasons why we like this stock: i. Strong earnings growthWe expect the group’s core PATAMI to grow at a CAGR of 47.9% over FY15-18F (Figure 1). Firing on most cylinders, growth would be driven by MMC’s: i) ports division, ii) engineering & construction business, and iii) stable energy & utilities wing.We also expect the growth to be supported by land sales from its Senai Airport City (SAC) development. Being the sole international airport in south Malaysia, we expect SenaiAirport) to see continued growth in passenger traffic in tandem with Iskandar Malaysia’s maturity. Meanwhile, the growth in the development corridor’s industrial sector is also likely to contribute positively to cargo throughput at MMC’s seaports and the airport in thearea.

ii. Ports for free The residual value of MMC’s market cap implies that its NLBs are worth only MYR2.5bn. However, this only explains the bulk of its non-port NLBs, which include the construction division, Senai Airport and SMART concession amongst others. We value these collectively at MYR2.6bn. Essentially this implies that the market is ascribing a negative value to MMC Ports, which would indicate that investors are likely to get the group’s port assets for free (Figure 2).

iii. Bargain basement for NLBs We looked at the value ascribed to the NLBs of two other conglomerates within RHB’s coverage, ie IJM and Sunway, to have a better sense of the market discount on MMC’s NLBs (Figure 3).

IJM. The value of IJM’s NLBs makes up 90% of its equity value and has an implied valueof 18x FY16F P/E. This is much higher than the implied value ascribed to MMC’s NLBs,which are at 13.1x FY16F P/E. Ironically, IJM’s NLBs are made up of concession assets, engineering & construction, property development and Kuantan Port, ie similar to that of MMC’s NLBs.

Sunway. The market ascribes a lower value to Sunway’s NLBs, implying FY16F P/E multiples of 10.2x and explains 67% of its market cap of MYR5.4bn. We believe the tepid valuation ascribed to the group’s NLBs is due to the bulk of these businesses being within the property segment. Still, this is a slight discount to the sector’s multiples of 10-11x.Based on the implied value of the NLBs for these companies, we believe the discount applied to MMC’s NLBs is unjustified. The current residual value of the group’s market cap that represents the NLBs is only 47% of MMC’s total market cap despite having goodearnings visibility and quality assets.

iv. Potential value unlocking exercise Management has reaffirmed plans to list the port assets in the near future. We believe there is huge value to be unlocked from the listing exercise given the massive discounts currently ascribed to its NLBs.

Assuming MMC Port is listed at our valuation of MYR7.1bn, we estimate that MMC’s intrinsic value could be increased to MYR7.4bn-8.2bn. This is based on the assumption that the group retains a 30-40% stake in the listed company (Figure 4). This represents a 40-53% increase, or by MYR2.1bn-2.8bn in its intrinsic value.

Source: RHB Research - 11 Mar 2016