Value seen in MMC despite Pan Borneo Highway uncertainty

CONGLOMERATE MMC Corp Bhd, which lost nearly RM4bil in market capitalisation over the past two years, has come under the spotlight again.

Investors are closely monitoring MMC Corp following recent news flow on the possibility of the federal government ditching the project delivery partner (PDP) model for the RM29bil Pan Borneo Highway, in favour of a turnkey contractor model.

According to Deputy Works Minister Mohd Annuar Tahir, a “firm and final” decision on the Pan-Borneo Highway is expected to be made by the end of this month.

If the federal government goes ahead with the model-change, this will mark the second time for MMC Corp to be affected by the government’s shift away from PDP towards turnkey contractor.

Less than a year ago, MMC Corp lost its PDP status for the MRT2 project.

The conglomerate and its partner Gamuda Bhd later became the turnkey contractor for MRT2, after they agreed to cut the project’s price tag by 23%.

Under the Pan Borneo Highway project, MMC Corp holds an effective 20% stake in Borneo Highway PDP Sdn Bhd - the PDP for the 706km Sabah portion.

Borneo Highway PDP is 40% owned by a MMC Corp-UEM Group joint-venture entity, while the majority stake of 60% is owned by Warisan Tarang Construction Sdn Bhd.

MIDF Research says MMC Corp’s construction order book could fall to RM9.5bil from RM11bil as at end-2018, assuming that the group is not re-appointed as the contractor under the turnkey model and with the new model being implemented in May 2019.

“Based on our preliminary analysis, overall earnings of MMC Corp could decline by approximately 3.2% and 5.1% in the financial year of 2019 (FY19) and FY20 respectively,” it says in a research note.

Meanwhile, RHB Research Institute expects MMC Corp to participate in the Pan Borneo Highway project as a turnkey contractor.

However, it also says that if MMC Corp is excluded from the project under the new development model, the earnings risk is RM19mil or 9% of its forecast FY19 core net profit.

“Pending more updates on the issue, we keep our FY19 core net profit at RM219mil,” it wrote in a note.

RHB Research Institute notes that MMC Corp’s effective value in the highway project, spanning across Sabah and Sarawak, is RM1.21bil.

In terms of progress, the Sabah portion of the highway, is 12.4% completed, with a cost of RM609mil as of Feb 2019.

Speaking to StarBizWeek, a construction industry veteran says it is highly likely for MMC Corp to partake in the project again under the turnkey model.

“The company already has the expertise in large scale construction projects and the experience in building the highway so far.

“If the company and its partners can agree to cut costs and adhere to the government’s requirement, then there should be no problem for MMC Corp to do the Pan Borneo Highway under the new model,” he says.

In the past few years, MMC Corp’s operations have gone through turbulent times, although it was backed by its portfolio of major infrastructure projects and the operations of the country’s key ports.

Its pre-tax profit has consistently declined since FY15.

The share price been on a general downtrend since Jan 2017, depreciating sharply by nearly 54%.

Gross profit margin fell from 39.02% in FY15 to 33.19% in FY18, according to Bloomberg.

The company was also hit by uncertainties, after the new Pakatan Harapan government embarked on its review of mega-infrastructure projects in Malaysia.

MMC Corp’s 12-month trailing price-to-earnings (PE) ratio is 14.11 times, while the forward PE ratio is 12.26 times, based on Bloomberg figures.

This indicates the company faces possible decline in earnings in the current FY19.

However, despite the lingering concerns, brokerages feel that value for investors in MMC Corp has emerged.

Three research houses namely MIDF Research, DBS Research and RHB Research Institute have “buy” calls on the conglomerate. Another three research firms have “hold” calls.

The 12-month consensus target price, based on Bloomberg data, is RM1.37. On March 22, the stock closed at RM1.03, down by 1.91%.

“We continue to favour MMC Corp due to the valuations supported by the market capitalisation of its listed associates Malakoff and Gas Malaysia and synergies from the full acquisition of Penang Ports, supported by the container terminal business and the cruise terminal operations in collaboration with Royal Caribbean Cruises Ltd driven by the growth in tourism in Penang,” says MIDF Research.

“While the possibility of MMC Corp to be no longer involved in pan Borneo Highway poses a risk on earnings, we understand that the company is actively bidding for a few large scale infrastructure projects which could act as a buffer for its construction orderbook.

“The target is one to two projects a year with an individual value ranging from RM250mil to RM500mil,” says MIDF Research.

Meanwhile, RHB Research Institute says that the outlook of MMC Corp’s ports and logistics business is still good.

“While the engineering division may face near-term uncertainties, the ports unit’s net profit should enjoy double digit growth due to full-year contributions from Penang Port in FY19,” it says.

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