MMC to focus on rising competition at existing ports
KOTA KINABALU: The cancellation of MMC Corporation Bhd's (MMC) proposed acquisition of a stake in Sabah Ports Sdn Bhd (Sabah Ports) will allow the group to instead focus on increasing competitiveness of MMC's existing ports, analysts opine.
In a filing on Bursa Malaysia, MMC revealed that the group had received a letter from the State Economic Planning Unit of Sabah to confirm their non-acceptance of MMC's proposal, through MMC Port Holdings Sdn Bhd, to acquire 20 per cent equity in Suria Capital Holdings Bhd's wholly-owned subsidiary Sabah Ports.
According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), the proposed acquisition of Sabah Ports would have enabled MMC to have a presence in the Brunei Dar us sal am-Indonesia-Malaysia Philippines East A sean Growth Area (BIMP-EAGA).
“Nonetheless, we believe that the cancellation of the proposed acquisition would allow MMC Corp to focus on increasing competitiveness of its existing ports while completing the acquisition of the remaining 51 per cent stake in Penang Ports,” MIDF Research said.
As such, MIDF Research maintained its earnings forecasts as the research arm previously did not impute earnings from the proposed acquisition of Sabah Ports into its estimates.
The research arm projected core profit after tax and minority interest (PATAMI) of RM441.5 million and RM525.8 million for financial year 2018 forecast (FY18F) and FY19F, respectively.
“Nonetheless, we are taking this opportunity to adjust our valuation to reflect the uncertain macroeconomic environment stemming from looming trade wars between the US and China.”
Hence, MIDF Research imputed a higher weighted average cost of capital (WACC) of eight per cent (seven per cent previously) into its discounted cash flow (DCF) valuation for MMC's ports segment.
Similarly, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) made no changes to its FY18-19E numbers as the acquisition was not incorporated into its earnings model.
Kenanga Research's core net profit numbers for FY18E and FY19E were RM289.2 million and RM365.7 million, respectively.
“Even if the acquisition were to go through, we reckon that MMC was most likely to be seeking only an associate's stake in Sabah Ports, and thus, would not be overly earnings accretive.
“We view the move was mostly just to bolster MMC's profile as the country's largest port operator, ahead of its efforts for a potential spin-off listing of its ports operations,” the research arm said.
Kenanga Research's ‘outperform' maintained call was premised on MMC being a compelling SoP-valuation play, as the share is currently trading grossly discounted from its SoP value, with a spin-off listing of its ports operations to potentially acting as a re-rating catalyst.
As for MIDF Research's reiterated ‘buy' call, it was mainly predicated on potential listing of MMC's ports assets, expected synergies from full acquisition of Penang Ports and healthy construction order book of more than RM10 billion.