MMC Corp Bhd
(Jan 3, 84.5 sen)
Maintain buy with a lower target price (TP) of RM1.37: MMC Corp Bhd’s (MMC) current share price of 83.5 sen is cheaper than the value of its ownership in Malakoff and Gas Malaysia combined at 85 sen per share.

Effectively, the market is ascribing zero value for all of MMC’s other assets, with the most obvious mispricing being its port operations, which have generated steady earnings historically.

Our standard operating procedures (SOP)-derived TP of RM1.37 is deemed to be conservative as it is equivalent to only 0.44x financial year 2019 forecast (FY19F) of price to book value.

MMC has announced that Senai Airport Terminal Services (SATSSB) has started to manage Kertih Airport.

Note that SATSSB is wholly owned by MMC, while Kertih Airport is the main airbase for oil and gas operations in Terengganu.

The contract to manage Kertih Airport will be for three years effective Jan 1, 2019. We are neutral on the news as we understand that the revenue impact is less than RM3 million annually, hence close to zero impact for FY19F earnings.

We lower our financial year 2018 to 2020 forecasts (FY18F-20F) recurring net profit by 14% to 40% per annum to take into account the lower revenue and earnings estimates for its engineering segment.

Recall that on Oct 28, 2018, MMC-Gamuda reduced the cost of the outstanding 60% of Mass Rapid Transit Line 2 underground works by 36% to RM6.4 billion.

Previous TP was RM2.40. We are now assuming a higher holding company discount of 50% (from 30%), lower earnings from the engineering segment, and other housekeeping for the valuation of the other segments in our SOP.

Despite the reduction in TP, we still like the stock as we think earnings should improve in FY19F with potential rerating once its port assets are spun off.

Full-year FY18 earnings are expected to be announced by the end of February 2019.

We expect lacklustre FY18F earnings of RM132 million (-37% year-on-year [y-o-y]) due to weaker earnings projected for the engineering segment.

However, FY19F earnings should improve 65% y-o-y to RM219 million due to organic volume growth at both Pelabuhan Tanjong Pelepas and Northport.

The Johor Port expense is expected to decline y-o-y due to better cost management.

Going forward, we expect any negative news from the engineering segment to have little impact on MMC’s share price as its earnings before interest, taxes, depreciation and amortisation contribution made up only 6% of MMC’s cumulative nine months of financial year 2018 earnings, with 87% from the ports and logistics segment. — RHB Resarch Institute, Jan 3