Markets
MMC could list ports by end-2018
UOB Kay Hian Research | 03 Nov 2017 00:30
There is room for share price recovery as MMC’s port business is currently undervalued

AS A joint venture (JV) partner for the Smart tunnel concession, we expect MMC Corp  to follow in Gamuda Bhd’s footsteps by booking a RM98 mil impairment charge on Smart. The provision will be made in the upcoming quarterly results (Q3FY17). This non-cash provision reflects lower-than-expected traffic numbers (guidance: 40,000/day versus actual: 30,000/day).

We expect MMC’s net profit this year (excluding the above Smart non-cash provision) to contract 5% year-on-year (yoy) to RM350 mil in the absence of landbank sales, which partly lifted 2016’s headline net profit to RM550 mil. The relatively flattish full-year earnings would be due to the substantial completion of the Mass Rapid Transit (MRT) Line 1 (Sungai Buloh-Kajang) and consequently, lower fees recognised for the project delivery partner portion.

There is also a timing gap between the Line 1 and Line 2, hence we believe this is the cause for a shortfall in terms of short-term earnings projection. Nevertheless, an asset unlocking exercise will provide room for share price recovery as we believe the port business is currently undervalued. Based on the current market capitalisation of RM6.12 bil, the port business is valued at 9.8 times annualised 2017 profit after tax and minority interest.

Stepping into next year, we expect the group to focus on port efficiency and cost-optimisation. This could pave the way for a potential listing of its port assets by end-2018. To recap, H1FY17 port revenue rose 5% yoy, thanks to higher contribution from the refinery and petrochemical integrated development project at wholly-owned Johor Port (container volume rose 12% year-to-date [YTD]). Elsewhere, 70%-owned Port of Tanjung Pelepas also experienced firm business activities YTD. Unfortunately, there appears to be some pockets of weakness from Northport due to price competition from Westports. Maintain hold with target price of RM2.20.