MMC unlocks value for Middle East asset
KUALA LUMPUR: Analysts are favourable on MMC Corporation Bhd’s (MMC) proposal to dispose eight per cent of its direct equity interest in Red Sea Gateway Terminal (RSGT) in Jeddah, Saudi Arabia by the first half of 2021.
MMC holds cumulative 20 per cent equity interest in RSGT. The value of the proposed disposal is equivalent to approximately RM227.6 million.
Based on the transaction, the value of MMC’s eight per cent stake in RSGT translates to approximately RM2.8 billion in equity value for RSGT with an implied price earnings ratio circa 62 to 64 times per FY19 RSGT net profit.
Additionally, the implied value for MMC’s remaining stake of 12 per cent is the range of RM341.4 million. Given the poor price performance of RSGT, the team at MIDF Amanah Investment Bank Bhd (MIDF Research) believe unlocking RGST value will only be mildly favorable.
“Once completed, we opine that the proceeds from the disposal will improve cash position of the company that could be used to power its working capital or even be
Once completed, we opine that the proceeds from the disposal will improve cash position of the company that could be used to power its working capital or even be disbursed back to shareholders via special dividends.
MIDF Research
disbursed back to shareholders via special dividends,” it said in its notes.
“Should the cash be converted into special dividends, we estimate an additional seven sen or 5.7 per cent yield can be expected on top of our current FY21F dividend estimate of 4.5sen.
“Furthermore, with previous 20 per cent stake and average contribution to MMC’s net profit circa RM10.9 million a year, the slight trimming that will translate to an additional cash of about RM200 million can be allocated to higher yield investments for MMC in the future.”
Given the small disposal of RSGT which will only contribute minimally to MMC’s earnings, MIDF Research maintained its earnings estimate for MMC at this juncture.
Similarly, AmInvestment Bank Bhd (AmInvestment Bank) was mildly positive on the latest development as the RM227.6 million disposal proceeds will improve MMC’s net debt and gearing of
RM8.79 billion and 0.94 times respectively as at September 30, 2020 to RM8.57 billion and 0.91 times respectively.
“The impact of the partial stake disposal to MMC’s operating profits is immaterial,” it put forward in its own notes. “For 9MFY20, RSGT contributed less than five per cent of the total group’s core net profit.
“Post-exercise, MMC will only equity account for 12 per cent of RSGT’s earnings versus 20 per cent before the exercise.”
AMInvestment Bank believed the port sector in the region – Malaysia included – has come out from the pandemic relatively unscathed.
“Over the long term, its outlook is resilient, underpinned by global trade and investments in the manufacturing sector that generate tremendous inbound (feedstock) and outbound (finished product) throughput for ports,” it observed.
“There have been significant relocations of the manufacturing base by multinational companies out of China due to the rising labour and land costs, exacerbated by the US-China trade war.
“MMC is well positioned to capitalise on these via its stable of five ports in Peninsular Malaysia with a total container handling capacity of 21.3 million TEUs annually, which is 50 per cent higher than its peer, Westports.”