This article first appeared in The Edge Financial Daily on August 18, 2017 - August 24, 2017

MMC Corp Bhd
(Aug 17, RM2.40)
Maintain outperform with an unchanged target price of RM2.90: MMC Corp Bhd has been widely understood to be seeking a listing for its port operations in the coming one to two years. It is currently deemed the largest port operator in the country, having operations at most of the major ports along the west coast of Peninsular Malaysia. In its efforts to bolster its profile, MMC has recently confirmed that it is in talks to acquire a stake in Sabah Ports Sdn Bhd. If the talks go through, this would potentially add another eight Sabah ports to MMC’s current port profile.

Sabah Ports is currently wholly owned by Suria Capital Holdings Bhd (contributing more than 90% of its revenue), which in turn has the Sabah state government as its largest shareholder with a 50.7% stake. As such, we reckon that MMC would most likely end up with an associate’s stake, with Suria Capital maintaining control over Sabah Ports. Taking Suria Capital’s market capitalisation as an indicative acquisition price, an assumed 30% stake would arrive at a value of around RM187 million, implied valuations of 10 times price-earnings ratio and 0.6 times price-to-book value, potentially contributing approximately an additional 3% and 4% to financial year 2017 (FY17) and FY18 earnings.

MMC and Sime Darby Bhd had previously entered into a memorandum of understanding to study the feasibility of developing an integrated maritime city on Carey Island. Although it is currently still in the early conceptualisation stages, if it materialises, Carey Island may potentially be a game changer for the local industries. With total port capacity reportedly at around 30 million 20-foot equivalent units per year, this represents almost twice Port Klang’s current capacity, with the industrial city development as the main driver of volume to meet this capacity. At MMC’s level, we reckon that the materialisation of such a plan would see a potential capital expenditure ranging from RM30 billion to RM60 billion, with the timeline for the entire project totalling 20 years, being developed in phases.

We are retaining our earnings forecasts for now, pending the release of its upcoming results for the second quarter ended June 30, 2017, later this month. While the port segment is expected to stay relatively stable, risks in earnings swing may potentially come from a slower-than-expected earnings recognition from its construction projects and an absence of land sale in Senai Airport City. — Kenanga Research, Aug 17