By Sherilyn Goh
After spinning off its energy arm in May this year, the next closely watched move by MMC Corp will be the listing of its port assets, following the substantial shareholding it acquired in NCB Holdings in October. Better still, analysts suggest that the stock is severely underpriced at current valuations, a mismatch to be taken advantage of.
Business model: MMC Corp Bhd can trace its roots to the establishment of Malayan Tin Dredging Ltd in London in 1911. The group then moved its operations to Malaysia by incorporating itself as Malayan Tin Dredging (M) Bhd in 1976, and made its debut on Bursa Malaysia the following year on July 12.
In 1981, after merging with New Tradewinds Sdn Bhd – which had earlier acquired London Tin Corp, the group renamed itself Malaysia Mining Corp Bhd, forming the world’s biggest integrated tin producer.
After ceasing its local mining operations in 1983 and divesting most of its mining stakes in subsequent years, the group has reinvented itself over decades as a utilities and infrastructure group with diversified business under three divisions today, namely energy and utilities, ports and logistics, and engineering and construction.
After Malakoff was listed on Bursa Malaysia in May 2015, MMC Corp continued to maintain a controlling stake in the independent power producer. Malakoff is the single largest shareholder of Gas Malaysia Bhd, and wholly owns Aliran Ihsan Resources Bhd, a water treatment plant operator.
Following Malakoff’s spinoff, the conglomerate generates its primary income from its ports and logistics division, which operates the Port of Tanjung Pelepas and Johor Port.
MMC also has a substantial shareholding in NCB Holdings Bhd, which operates North Port in Port Klang, and owns the largest container road haulage company in Malaysia, effectively controlling all but one trading container ports in Peninsular Malaysia.
Analysts are of the view that MMC’s next move will be to list its port holdings under a new entity, MMC Ports in 2016, thus creating the largest listed port operator on Bursa Malaysia, upon the successful takeover of Northport whose shares it has been diligently accumulating to trigger a mandatory takeover earlier in October.
Under the engineering and construction division, MMC is the leading project delivery partner (PDP) and underground works package contractor for the 51km Klang Valley Mass Rapid Transit (KVMRT) project. It has also been reappointed the PDP for the KVMRT Line 2 project.
MMC Corp has also secured many other key civil and infrastructure projects in the country including the Langat Centralised Sewage Treatment Plant, Langat 2 Water Treatment Plant, and the RAPID Pengerang Co-generation Plant.
It also owns and operates Senai International Airport in Johor Bahru, a major aviation hub which also provides the gateway to Iskandar Malaysia. Surrounding the airport is an area covering over 2,718 acres known as Senai Airport City which is being transformed into a major integrated industrial and commercial development.
MMC Corp also has a 2,255-acre free-zone industrial centre known as the Tanjung Bin Petrochemical and Maritime Industrial Centre, which offer complete facilities and infrastructure for tankage and terminalling as well as trading and logistics.
Shareholders and management: According to Bursa Malaysia, MMC Corp’s major shareholder is Indra Cita Sdn Bhd – a company linked to none other than the media-shy tycoon Syed Mokhtar Albukhary – which controls 51.76% of total shares.
Other shareholders include Permodalan Nasional Bhd (22.09%), Lembaga Tabung Haji (6.52%), the Employees Provident Fund (5.51%), and Retirement Fund Inc (3.28%).
The group’s is helmed by Che Khalib Mohamad Noh, 50, who was appointed group managing director of MMC and managing director of Malakoff effective July 1, 2013.
Prior to his current role, Che Khalib served as chief operating officer of finance, strategy and planning at DRB-Hicom Bhd. He also held the position as the president and chief executive officer of Tenaga Nasional Bhd since July 1, 2004, where he served for eight years until the completion of his contract on June 30, 2012.
Share performance: MMC Corp closed 1 sen higher at RM1.96 on Dec 4.
What analysts think: According to MIDF Research, MMC’s current market capitalisation of RM6.6 billion prices in only three port assets – which the research house values at RM6.9 billion while ignoring the remaining assets worth a combined RM8.5 billion after accounting for debts.
The research house also noted that the counter is currently trading at an undemanding price-to-book ratio (PBR) of 0.89 times and -1.5 standard deviation (SD) below its five-year mean.
“We believe that it should be trading closer to 1.3 times PBR which is +1.5 SD above its five-year mean as MMC is on a listing drive, unlocking the value of its subsidiaries which are ripe for listing,” said MIDF Research in its report published on Nov 24.
Moreover, it said, MMC’s port assets comprising the Port of Tanjung Pelepas, Johor Port and Northport could be listed as soon as the second half of 2016, creating the largest Bursa-listed port entity in terms of capacity at 18 million 20-foot equivalent units (TEU), compared with Westport’s 11 million TEU.
“The listing exercise could see MMC or MMC Ports raising between RM3.4 billion and RM4 billion, valuing MMC Ports at circa RM6.9 billion and RM8 billion.
“We believe that the appeal of MMC Ports lies in its geographically diverse port assets, located in central and southern hinterlands of Peninsular Malaysia with the inclusion of Peenang Ports which is held by MMC’s largest shareholder,” it wrote.
The group’s nine-month financial year 2015 (9M15) core profit after tax and minority interests (Patami) of RM164 million also come within expectation of MIDF Research, making up 60% of the research house’s full-year core Patami forecast of RM261 million.
“We believe that the 9M15 core Patami could have been dragged down by loss-making subsidiaries such as Senai Airport, Aliran Ihsan and SMART tunnel, which should see improvement in the fourth quarter due to seasonality and a toll rate hike,” wrote MIDF Research in its note published on Nov 26.
Among all its business divisions, the ports segment also emerged as the star performer, with revenue and profit before tax growing by 10.5% year-on-year (y-o-y) and 35.7% y-o-y respectively, attributed to increased container throughput volume in the Port of Tanjung Pelepas contributed by the 2M Alliance.
MIDF Research noted that profit before tax outpaced revenue growth due to lower operating expenses as management exercises various measures to improve cost efficiency.
Meanwhile, the engineering and construction segment saw revenue falling by 20% y-o-y and profit before tax reduced by 24% y-o-y due to lower progress payments from the KVMRT1 project.
The segment is expected to stage a recovery as its newly secured projects see progress being ramped up. “Recall that MMC’s outstanding order book stands at RM2 billion which is 2.2 times its financial year 2015 forecast (FY15F) construction revenue, and hence should keep them busy until 2017,” said MIDF Research.
“We are forecasting a RM6 billion replenishment in FY16 mainly from the tunnelling works for KVMRT2,” it added.
The research house is maintaining its “buy” call on the stock, with a target price of RM3.05 based on sum-of-parts valuation, implying FY16 price-earnings of 19 times and 1.3 times PBR.
Earnings forecast:
StockStalk: The nature of MMC’s business segments are those which have high barriers to entry and are not easily replicated, controlling logistics and ports, energy, as well as key infrastructure and civil projects in the country.
In addition, its energy and port businesses hold market leading, oligopolistic positions and are deeply intertwined with the domestic economy. The potential listing of MMC Ports as it had done so with Malakoff, steady contribution from its energy arm, as well as healthy order book from the construction segment also make the stock considerably attractive.
However do note that there is a risk of delay in the listing of MMC Ports should market sentiment deteriorate significantly in the upcoming financial year. This would effectively delay the group’s ability in repaying the RM1.4 billion loan it undertook for the acquisition of NCB Holdings, which carries annual interest expense amounting approximately RM56 million.
Investors may want to take advantage of the stock’s severe undervaluation to accumulate shares, and to ride on the group’s plans of unlocking the value of its port assets which could take place as soon as next year.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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