MMC Corp Bhd
(Oct 13, RM2.34)
Maintain market “perform” with a target price (TP) of RM2.81: MMC announced last week that the MMC-Sumitomo Consortium has secured the RM1.51 billion Centralised Sewage Plant project. The project also involves the construction of sewer network connection in the Langat River Basin catchment which is expected to be completed in six years.

We are “neutral” to “slightly positive” on the announcement. Assuming MMC owns the minimum majority stake of 51% in the consortium, the group would at least replenish RM767.6 million worth of order book. Hence, with the assumption of 7% profit before tax margins, the project can only contribute, on average, about RM6.7 million to the group’s net profit per annum until 2020.

That is only 2% of our financial year 2015 (FY15) net profit forecast of RM361.5 million.

Including this contract, year-to-date, we estimate MMC has secured about RM1.4 billion worth of projects, exceeding our FY14 new order book forecast of RM1 billion. So far for this year, MMC has secured three major government-related projects.

In total, we estimate that MMC’s current outstanding order book stands at RM3.4 billion which will last until 2020. A big chunk of its order book is still from the Klang Valley Mass Rapid Transit 1 tunnelling project.

While MMC’s outlook should remain bright driven by: i) the potential Malakoff Corp Bhd listing in the second quarter of 2015 (2QFY15) which will clean up the group’s balance sheet, ii) the growing construction and port divisions’ earnings; and iii) the recovery of core earnings in Malakoff. Nonetheless, we are still waiting for more clarity on the recent issue of Malakoff’s Tanjung Bin extension delays.

We believe that this issue, if not resolved, may cause negative sentiments among Malakoff investors if it really proceeds with an initial public offering in 2Q15. It may also potentially distort Malakoff’s earnings going forward.

Our forecast is relatively unchanged as the project’s duration is longer than our duration forecast for new orders of about three to four years. TP maintained at RM2.81 based on unchanged sum-of-parts-based valuation. Our TP of RM2.81 implies 23.7 times FY15 forward-price-to-earnings ratio (PER), in tandem with its five-year average forward-PER of about 25 times.

We prefer to get some clarity regarding the issue of Tanjung Bin extension delays despite the group’s earnings recovery. — Kenanga Research, Oct 13

This article first appeared in The Edge Financial Daily, on October 14, 2014.