MMC Corp Bhd
(Sept 10, RM2.51)
Maintain buy with target price of RM2.54: MMC’s share price has fallen 6% year-to-date versus the KLCI’s 2% gain, due to disappointing earnings as a result of Tanjung Bin power plant’s (in Johor) maintenance, delays in Malakoff Corp Bhd listing and the abortion of the P3 alliance.
But 2QFY14 results suggest stronger earnings ahead; MMC will book full-quarter capacity payments in 3QFY14. We view the delay of Tanjung Bin Phase 2 as a temporary setback that would at worst shave 2 sen off our standard operating procedure (SOP) valuation. The Malakoff listing is slated for 2QFY15 and is unlikely to be delayed again because the company has RM1.8 billion junior sukuk due in September 2015, which if not repaid will see a sharp increase in interest rate from 6.3%.
Assuming MMC reduces its stake in Malakof to 35% from 51%, this would remove RM17.5 billion of Malakoff’s debt from its balance sheet, reduce gross gearing to 0.7x from 2.1x now, and lift FY15 to FY16F earnings per sen by 8% to 14%.
Pelabuhan Tanjung Pelepas Sdn Bhd will benefit from the 2M alliance, a 10-year vessel sharing agreement between Maersk Line and MSC which could add 0.5 million twenty-foot equivalent units (TEUs) throughput. Maersk might also shift up to two million TEUs from Singapore. MMC is being more selective in land sales especially in Tanjung Bin where it has ploughed in proceeds from the Vitol Terminal BV deal for infrastructure. It may be looking at a minimum of RM50 per sq ft (psf) from the sale/lease of land in Tanjung Bin/Senai, compared to RM28 to RM30 psf in our sum-of-parts valuation.
MMC remains a deep value stock. — AllianceDBS Research, Sept 10
This article first appeared in The Edge Financial Daily, on September 11, 2014.