This article first appeared in The Edge Financial Daily, on October 21, 2015.

MMC Corp Bhd
(Oct 20, RM2.27)
Maintain buy with an unchanged target price of RM2.60: MMC Corp (MMC) has announced it intends to acquire a 53.4% stake in NCB Holdings Bhd from Permodalan Nasional Bhd and AmanahRaya Trustees Bhd for RM1.1 billion (RM4.40 per share) via debt.

This would bring MMC’s stake in NCB from 30.1% to 83.5%, thus triggering a mandatory general offer (MGO). MMC does not intend to maintain NCB’s listing status. 

The potential privatisation of NCB will not come cheap for MMC. At RM4.40 per share, MMC is valuing NCB at a price-earnings ratio (PER) of 55 times or enterprise value/earnings before interest, taxes, depreciation and amortisation of 12.3 times based on annualised 2015 earnings per share of eight sen. In comparison, Westports Holdings Bhd currently trades at 2015 PER of 26 times.

If the MGO is successful, MMC would acquire the remaining 16.5% in NCB at an additional cost of RM340 million. Nonetheless, we believe NCB’s future earnings may improve from rising container throughput and potential container tariff revisions.

Strategically, NCB would increase MMC’s presence in the central region of Peninsular Malaysia as MMC’s ports are located in Johor.

We believe MMC’s 2016 earnings may erode by 6.5%, as we estimate the higher finance costs from issuing debt of RM1.44 billion to privatise NCB will outweigh the consolidation of NCB’s earnings, while assuming a conservative 5% growth to NCB’s annualised 2015 earnings.

Assuming an interest rate of 5%, MMC would incur RM54 million in additional after-tax financing costs versus NCB’s annualised 2015 earnings of RM37 million.

MMC’s gross debt to equity will increase from 0.8 times to 0.95 times from this privatisation exercise.

NCB has a fairly small net debt position of RM79 million. Its earnings contribution to MMC will still be less than 10% even if NCB is privatised.

Key rerating catalysts for the stock include a further clarity on tunnelling works for the mass rapid transit 2, sustained recovery in associates (Malakoff Corp Bhd and Gas Malaysia Bhd) and winning new construction projects (such as high-speed rail) and/or concessions. — Affin Hwang Capital Research, Oct 20