This article first appeared in The Edge Financial Daily on April 10, 2018

MMC Corp Bhd
(April 9, RM1.45)
Maintain buy with a lower target price (TP) of RM2.51: Suria Capital Holdings Bhd announced that it is no longer planning to sell a stake in its wholly-owned subsidiary, Sabah Ports Sdn Bhd (SPSB), to MMC Corp Bhd’s subsidiary, MMC Ports Holdings Sdn Bhd. SPSB holds a 30-year concession to operate eight major ports in Sabah from 2004. Four of Suria Capital’s ports are located on the west coast of Sabah and four on the east coast.  

MMC Corp confirmed in August 2017 it was already in talks with Suria Capital regarding the proposed acquisition of a stake in SPSB. However, details of the acquisition price were never disclosed.

The proposed acquisition of SPSB would have enabled MMC Corp to have a presence in the Brunei Darussalam-Indonesia-Malaysia-Philippines East Asean Growth Area (BIMP-EAGA). Nonetheless, we believe that the cancellation of the proposed acquisition would allow MMC Corp to focus on increasing competitiveness of its existing ports, while completing the acquisition of the remaining 51% stake in Penang Port.

We maintain our earnings forecasts as we previously did not impute earnings from the proposed acquisition of SPSB into our estimates. Nonetheless, we are taking this opportunity to adjust our valuation to reflect the uncertain macroeconomic environment stemming from a looming trade war between the US and China. Hence, we are imputing a higher weighted average cost of capital of 8% (7% previously) into our discounted cash flow (DCF) valuation for MMC Corp’s port segment.

We reduce our sum-of-parts-derived TP to RM2.51 (from RM2.72) as we tweak our DCF valuation for MMC Corp’s port segment. Our “buy” call is mainly predicated on the potential listing of its port assets, expected synergies from the full acquisition of Penang Port and healthy construction order book of more than RM10 billion. — MIDF Research, April 9