Apr 19, 2016

MMC - Good Earnings Visibility; Catalysts From Listing Of Ports And Contract Wins

MMC CORPORATION BHD Stock Code 2194

 

MMC recently bagged two sizeable contracts that lifted its orderbook by 53% to RM30b. This provides good earnings visibility and will help tide MMC over the decline in construction earnings in 1H16. We are positive on earnings momentum in 2016 with PTP set to record a modest 5% volume growth and a gradual turnaround at NCB. Maintain BUY with a marginally higher target price of RM2.68 as we raise earnings forecasts by 3% to incorporate the recent Pan Borneo Highway (Sabah) PDP contract.

 

WHAT’S NEW
 Good earnings visibility... MMC Corporation’s (MMC) engineering and construction (E&C) division recently bagged two sizeable contracts totalling RM10b (based on MMC’s effective stake). With progress billing stretching over the next five years, the contract award is expected to lift MMC’s construction orderbook by 53% to about RM30b. Importantly, the contract wins provide good earnings visibility and will help tide over
gradually declining construction earnings, given tail-end works for the KVMRT Line 1 tunnelling and PDP fee.


 ...with two contract wins recently
. To recap, the two new contract wins are: a)
RM15.5b MMC-Gamuda joint venture tunnelling contract for the KVMRT Sg BulohSerdang-Putrajaya Line, or more commonly known as Line 2, and b) RM13b project delivery partner (PDP) in respect of the implementation of Phase 1 of the Pan Borneo Highway (Sabah). MMC’s effective stake in the PDP role for this project is 20%.

 

mmc financial analysis


STOCK IMPACT
PDP fee structure. The KVMRT Line 1 PDP fee remains at 6% but we gather from management that the fee structure for the Pan Borneo Highway (Sabah) is likely in the range of 5.5% of the total contract value of RM13b. There is a 0.5% bonus element should the consortium exceed its KPIs.

We raise our 2017-18 net profit forecasts by 2.7% and 3.4% respectively, factoring in Pan Borneo Highway (Sabah) PDP fee. We expect the E&C division to account for at least 30% of MMC’s pre-tax profits in the next three years. This represents a step up from the 16% pre-tax contribution in 2015, reflecting tail-end construction work orders.

 

LT catalyst: Upside from KVMRT Line 3 – the Circle Line. The Circle Line will be the third MRT line for Klang Valley Mass Rapid Transit Project, slated to be tendered only in 2021. We expect this line to cover major hotspots in sprawling downtown Kuala Lumpur city centre with a substantially higher portion of the awards involving underground works, ie tunneling works. Based on our conservative estimates, the Circle Line is valued at
RM28b and the tunneling portion is expected to worth more than KVMRT Line 2’s RM15.5b. Winning the Circle Line is a key re-rating catalyst for MMC in the longer term.


 

EARNINGS REVISION/RISK
2016 net profit forecast of RM435m will be driven by: a) stable earnings stream from Malakoff, in the absence of unplanned plant shutdown and a recovery in associate Kapar Energy Ventures, and b) 5% yoy growth in PTP’s TEU to 10m. We expect minimal construction contribution in 1H16 due to the tail-end progress billing from KVMRT Line 1 while profit recognition from the KVMRT Line 2 will pick up towards the end of the year.
Key risks include: a) a history of related-party transactions, b) political uncertainties, c) unplanned power plant shutdown at Malakoff, and d) low footfall at Senai Airport exacerbating operational losses.


 

VALUATION/RECOMMENDATION
Maintain BUY with a marginally higher SOTP-based target price of RM2.68 (from RM2.65) as we incorporate Pan Borneo Highway (Sabah) contribution. Our target price is based on a 30% discount to our SOTP valuation of RM3.83/share. At our target price, the stock trades at 15.4x 2017F PEt.

SHARE PRICE CATALYST
Bright prospects on listing of ports in the medium term. Over the longer term, we do not discount the possibility of MMC re-listing its port assets: a) 70% stake in PTP, and b) wholly-owned JPort hinterland and NCB. The port business accounts for 34% of our valuation, with JPort providing the cash flow prowess to the group.
Ports trade at an attractive 6x earnings. Based on its current market capitalisation, MMC’s port assets trade at an attractive 6x forward earnings, assuming holding company discount of 30%. Key risk is the injection of privately-held Penang Port by major shareholder Tan Sri Syed Mokhtar.

 

mmc project

 

source: UOBKayHian 19/04/2026

 

MMC CORPORATION BERHAD

The principal activities of the Group consist of investment holding construction supply and distribution of natural and liquefied gas manufacturing civil and specialized engineering construction and operation of privatized highway port operations fabrication property and mine management erection of power transmission lines power generation and design and construction of public light rail system.