This article first appeared in The Edge Financial Daily on December 10, 2019

MMC Corp Bhd
(Dec 9, 96.5 sen)
Maintain buy with an unchanged target price (TP) of RM1.30: MMC Corp Bhd accepted a letter of award from Petronas Gas Bhd appointing a joint venture (JV) company, MMC Engineering & Construction Sdn Bhd (MMCEC)-MMC Oil & Gas Engineering Sdn Bhd (MMCOG)-Sedia Engineering Works Sdn Bhd (SEW) (MMCEC-MMCOG-SEW JV) as the contractor for the engineering, procurement, construction and commissioning of the PGU-I gas pipeline replacement project for a contract price of about RM131.4 million. The last time MMC Corp was awarded a pipeline construction project was in the 1990s.

The project comprises the NPS 36 pipeline and associated station works for a total length of about 33km from the gas-processing plant in Kertih, Kemaman to Bukit Anak Dara Kijal in Terengganu. The project is expected to be completed within 35 months from December this year. Assuming normal construction project profit before tax (PBT) margins of 10% and accounting for MMC Corp’s 90% share of the JV company represented by MMCEC and MMCOG, the impact is immaterial for financial year 2019 estimates (FY19E) as an expected PBT would be around RM300,000 (less than 0.5% of FY19E PBT). Even for  FY20F and FY21F (forecasts), we are estimating an annual earnings accretion of around RM4.1 million which is relatively minimal, making up less than 1.5% of the forecast PBT in those years. The contract value attributable to MMC Corp can be considered insignificant compared with the construction order book of about RM7.2 billion.

While the earnings accretion is very minimal from the awarded contract, we view this award as MMC Corp’s ongoing efforts to ensure a sustainable construction order book. Recall that MMC Corp is actively proposing a few railway-related projects to several state governments. The group has also put forward alternative solutions for the proposed railway projects which promote better cost efficiency and reduce its total cost of ownership by one third of the normal costs. This is in addition to the submitted proposal to revise the Mass Rapid Transit Line 3 (MRT3) project at a price tag lower than RM45 billion to the government in December 2018. As such, we believe that this could provide earnings visibility for the segment as the Klang Valley (KVMRT2) reaches completion in 2022.

We are revising our FY20F and FY21F earnings upwards by 1.3% and 1.1%% to RM247.4 million and RM289.8 million respectively after imputing the earnings accretion from the contract. Meanwhile, we are leaving our FY19E earnings unchanged due to the immaterial impact for the year.

Since the earnings adjustment had minimal impact on the construction segment under our sum-of-parts valuation, we are maintaining our TP at RM1.30 per share.

We continue to favour MMC Corp due to: i) valuations supported by the market capitalisation of its listed associates Malakoff Corp Bhd and Gas Malaysia Bhd; 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 the growth in tourism 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, especially railway, which will act as a buffer for its construction order book. Key downside risks to our call include: i) prolonged global trade tensions; ii) weak container volumes at MMC Corp’s ports; and iii) a downward revision of its listed associates. All factors considered, we reiterate our “buy” call on MMC Corp with an unchanged TP of RM1.30 per share. MMC Corp has been included as a constituent of the FTSE Bursa Malaysia Mid 70 Index. — MIDF Research, Dec 9