Limited risks for MMC from Pan Borneo takeover
KOTA KINABALU: MMC Corporation Bhd’s (MMC) overall earnings will likely decline slightly if the project delivery partner (PDP) model for the Pan Borneo Highway is replaced by an alternative mechanism, analysts observed.
Of note, there have been talks about the government replacing the current PDP mechanism for the execution of the Pan Borneo Highway project across East Malaysia.
Several companies are expected to be affected by this change but analysts have pointed out that the impact will likely be more significant in Sabah as progress has been slow for Sabah’s portion of the project.
According to the research team at MIDF Amanah Investment Bank Bhd (MIDF Research), the Sabah Portion in had reached 12.4 per cent completion with a cost of RM609m as of February 2019.
MMC’s exposure in the Pan Borneo Highway is seen through its effective 20 per cent stake in Borneo Highway PDP Sdn Bhd.
“Assuming that MMC would not be re-appointed as the contractor under the turnkey model and with the new model being implemented in May 2019, the construction orderbook will decline from RM11 billion as of December 31, 2018 to around RM9.5 billion.
“Based on our preliminary analysis, overall earnings of MMC could decline by approximately 3.2 and 5.1 per cent in FY19 and FY20 respectively,” the research team projected.
Despite the possible change in the project delivery process, MIDF Research said there is still a possibility that UEM and MMC could participate in the retendering process of the project.
“Assuming that both entities are able to reduce cost, we believe the outcome will be positive. This is taking into consideration the JV Co initial involvement in the project and the competitive cost advantage it is able to achieve, in comparison to potential tender bids by other contractors,” it added.
Aside from that, it pointed out: “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 RM250 million to RM500 million.
“It is also notable that the estimated orderbook of around RM9.5 billion under the absence of Pan Borneo Highway is fivefolds the construction revenue in FY18,” MIDF Research added.
Aside from that, there are still other underpinning factors that could support the group.
The research team highlighted that in the near-term, it expected MMC’s ports and logistics segment to benefit from the Penang Port’s full year contribution underpinned by economic activity in the Northern region of Peninsular Malaysia.
“We also note that Port of Tanjung Pelepas’s (PTP) role as a transhipment hub would not be directly susceptible under a full blown trade war between US and China as it mainly caters for intra-Asia trade lanes.
“Moreover, the impending IMO 2020 sulphur cup in January next year could spur support the transhipment volumes especially at PTP as shipping liners want to mitigate higher operating expenses from more expensive fuel,” it added.
All in, MIDF Research maintained its ‘buy’ call on the stock.