MMC Corp Bhd
(April 10, RM2.48)
Upgrade to buy from hold with a raised target price (TP) of RM2.90: We are upgrading our call on MMC Corp Bhd to “buy” (from “hold”) after raising our revised net asset value (RNAV)-based TP to RM2.90 (from RM2.35), following a revaluation of its assets after the release of its financial year 2016 (FY16) results.

We believe the current share price undervalues MMC’s assets, despite ascribing a 20% holding company discount to our RNAV. The recent completion of the Penang Port acquisition should pave the way for the listing of its port assets in 2018 or 2019, and unlock more value for shareholders. The port listing could potentially enhance value.

Although our RNAV values MMC’s port assets at RM3.8 billion, we believe the port could potentially be worth as much as RM6.6 billion if it is listed as a separate entity. Management has indicated that it plans to list the port assets by 2018 to 2019, and that it should be on schedule with the recent completion of the acquisition of Penang Port. 

However, determining the right capital structure for the new entity might take longer than expected, and could potentially lead to delays in the listing. 

In our view, MMC is a less-expensive indirect way for investors seeking exposure to Gamuda Bhd (TP: RM5.15; “buy”). Over 50% of our RNAV of RM2.90 is from the MMC-Gamuda joint venture (JV), which is the project delivery partner for the Klang Valley mass rapid transit project (Lines 1 and 2), contractor for tunnelling works related to both lines, and concessionaire for SMART.

In our forecasts, MMC shares trade at 12.6 times FY17 price-earnings ratio, versus Gamuda’s 16 times (on average FY17 to FY18 earnings per share; July year end). 

Gamuda’s key earnings driver relates to projects in the JV. Discounts on land could lead to a higher upside too. We currently value the Senai Airport City at RM25 per sq ft (psf), which is at a sharp discount to the selling price of RM45 to RM50 psf, which was transacted in 2015. 

We estimate that it will take MMC another 15 to 20 years to fully dispose of the 2,079 acres (841.34ha) of land it has, hence the huge discount. However, if sales were to come in stronger than we expect, this would help reduce the prescribed discount. 

The Senai Airport City land is 14% of our RNAV.

A near-term catalyst for the stock would be an improvement in earnings delivery by each business segment, while a longer-term one would be the listing of its port business and continued disposal of its land bank. 

Key risks include weaker-than-expected results of its associates, the inability to recognise land sales and delays in its port initial public offering schedule. — Affin Hwang Capital, April 10