This article first appeared in The Edge Financial Daily on August 14, 2019
MMC Corp Bhd
(Aug 13, RM1.03)
Maintain buy with an unchanged target price (TP) of RM1.31: We believe MMC Corp Bhd’s second quarter of financial year 2019 (2QFY19) normalised profit will be between RM55 million and RM60 million, representing increases of approximately 10% year-on-year (y-o-y) and 3% quarter-on-quarter (q-o-q). We anticipate a rebound in earnings this year buttressed by growth in container throughput supported by its stable of ports.
Overall, container throughput of MMC Corp’s ports is expected to be higher as Malaysia’s leading economic index is still pointing towards a path of recovery, suggesting that gross domestic product (GDP) growth in the second quarter of 2019 (2Q19) may be higher than in 1Q19, backed by an export growth in 2Q19 of 4% q-o-q. The bulk of growth in container throughput would be underpinned by the Port of Tanjung Pelepas (PTP), which constitutes around 60% of MMC Corp’s total container throughput. Based on data from the Johor Port Authority, PTP grew at a tune of approximately 6% q-o-q and 7% y-o-y to reach around 2.36 million twenty-foot equivalent units. Moreover, the fact that Maersk owns 30% of PTP would shield the port from any effects of reshuffling of alliances seen in Port Klang during FY17.
We opine that the impact from the ongoing trade war between the US and China will be muted on MMC Corp’s ports, predicated by resilient demand in both China and the US (indicated by retail sales and business confidence despite the ongoing trade tensions between the two nations). Such trade disputes may continue prompting companies, especially in China, to relocate their business hubs to Asean, benefitting countries such as Malaysia. It is also worthwhile to note that the percentage of contributions from the US and China has been increasing slightly thus far this year despite the occurrence of the US-China trade war. Meanwhile, Malaysia’s trade contribution from Asean remained robust at 26.8% for the cumulative six months of FY19, corroborating with the International Monetary Fund’s 2019 economic growth projection for Asean of 5%.
Looking ahead, the company is actively bidding for a few marine infrastructure-related projects with a price tag of RM300 million to RM500 million. As such, we believe this could provide earnings visibility for the segment as the Klang Valley Mass Rapid Transit Line 2 (KVMRT2) reaches completion in 2022.
For its associate company Malakoff Corp Bhd (“non-rated”), we have gathered that the power purchase agreement for the loss-making Kapar Energy Ventures will expire by year end. Henceforth, we believe there will be minimal earnings disruption to Malakoff following the completion of the acquisition of Alam Flora. The performance of Alam Flora has been commendable in the past few years with a five-year profit before tax (PBT) compound annual growth rate of 12% and its PBT margin remaining above 10%. The completion of the acquisition is expected around 4QFY19. Meanwhile, the acquisition of Khazanah Nasional Bhd’s 40% stake in Malaysian Shoaiba Consortium Sdn Bhd (MSCSB) for US$70 million (RM288 million) by Malakoff would also better address the potential earnings gap. Earnings accretion for Malakoff is expected to be derived from the remaining contract period of approximately 10 years under Shuaibah Water & Electricity Co Ltd’s power and water purchase agreement and Shuaibah Expansion Project Company’s water purchase agreement indirectly owned by MSCSB.
As for Gas Malaysia Bhd (“buy”; TP: RM3.50), we reiterate our view that the gas sales volume in FY19 will continue to be sustained and register y-o-y growth. Our current gas volume growth projection remains between 6% and 6.5%, similar to that of FY18. Our assumption is premised on a resilient national GDP growth of 4.5% to 4.7% for 2019. Moving forward, we believe gas sales volume growth will be primarily driven by the rubber, oleochemical, consumer product and glass manufacturing industries, supported by a GDP growth of about 4.5% to 4.7% in 2019.
We have made no changes to our earnings forecasts.
We continue to favour MMC Corp due to: i) valuations supported by the market capitalisation of its listed associates, Malakoff and Gas Malaysia; and ii) synergies from the full acquisition of Penang Port supported by the container terminal business and cruise terminal operations, in collaboration with Royal Caribbean Cruises Ltd, which will be driven by tourism growth in Penang. Other catalysts for MMC Corp include the possible reinstatement of the KVMRT3 project at a revised cost (possibly half the original price tag of RM45 billion). Moreover, we are confident that MMC Corp will be able to clinch new construction projects as a buffer for its construction order book. Key downside risks to our call include: i) prolonged global trade tensions; ii) weak container volumes for MMC Corp’s ports; and iii) downward revisions for its listed associates. — MIDF Research, Aug 13