MMC Corporation (MMC MK/ HOLD/RM2.49/Target: RM2.50)
Increases Stake In Penang Port To 100%; Develops Carey Port
1) Acquires remaining 51% stake in Penang Port for RM220m. MMC Corporation will acquire the remaining 51% stake in Penang Port Sdn Bhd (PPSB) for RM220m cash in order to gain full control of PPSB and be in a position to determine its future strategic direction.
MMC Port Holdings Sdn Bhd, a wholly-owned subsidiary of MMC Corp, has entered into a conditional share sale and purchase agreement with Seaport Terminal (Johore) Sdn Bhd to acquire the remaining 37.5m ordinary shares.
2) Sime Darby and MMC ink MoU with India's Adani Ports to study Carey Island marine project. Separately, it was reported in the media that Sime Darby Property Bhd, MMC Port Holdings Sdn Bhd and India's Adani Ports and Special Economic Zone Ltd (APSEZ) signed a memorandum of understanding (MoU) to study the feasibility of developing of an integrated maritime city on Carey Island,
Selangor. MMC Ports and Adani Ports also inked a separate MoU to explore the feasibility of the Carey Island Port Project - a new port as an extension of Port Klang, currently the 11th busiest container port in the world. Sime Darby said the maritime city is meant to
complement the Carey Island Port Project. Sime Darby Group president and chief executive Tan Sri Mohd Bakke Salleh said Carey Island's development fits strategically into the Malaysia Vision Valley Development, which will be spearheaded by the company.
Related-party transaction a negative. Whilst the additional stake acquisition was well guided by management, we view the acquisition negatively as it is a related-party transaction (RPT) and importantly, the acquisition is only marginally earnings accretive (2-3%) after
accounting for interest. At RM420m, Penang Port is valued at 17x earnings vs MMC’s 16x.
Marginal earnings accretion from Penang Port. To recap, MMC first bought a 49% stake in Penang Port (from its major shareholder Seaport Terminal Johore Sdn Bhd) for RM200m cash in Aug 16. Importantly, the acquisition is for the port business and excludes the ferry business. In 2015, the ferry losses amounted to RM23m and dragged down a profitable port business with a net profit run rate of at least RM25m annually. As such, the immediate earnings accretion is estimated at RM8m annually (assuming RM420m loan is financed at 6% interest). This accounts for 2-3% of the group’s consolidation port net profit run rate, we estimate.
Carey Port a long-term blueprint. Carey Island Port will likely be gradually built up over the next 10-15 years with an estimated port capex of RM40b. We do not expect an immediate port overcapacity (factoring in existing capacity from Westport and NCB) as MMC’s management will likely aim for an initial 1m-2m TEU capacity for Carey Island in its first few years of operations. Quite similar to PTP in Johor, Carey Island’s port capacity will be increased over time, dispelling the initial fear of overcapacity. At this juncture, it is too early to
impute the earnings impact from Carey Island Port but we believe the inclusion of another port will help pave the way for the eventual listing of MMC port by end-18. That said, we understand that the Carey Island port may not be immediately feasible without government
subsidy (likely for dredging works etc).
Maintain HOLD and SOTP-based target price of RM2.50, or a 40% discount to our SOTP valuation of RM4.20/share. All ports are currently valued at 15x forward earnings. The discount to our valuation reflects: a) the absence of a near-term re-rating catalyst, with the KVMRT Line 2 awarded in 3Q16, and b) looming election risk. The stock is current trading at 15x 2017F PE and 15.1x EV/EBTIDA. Entry price is RM2.00.
source: UOBKayHian – 5/4/2017