MMC Corporation. Company Guide

Transcription

1 Version 9 Bloomberg: MMC MK Reuters: MMCB.KL Refer to important disclosures at the end of this report Malaysia Equity Research 29 Aug 2017 BUY Last Traded Price ( 28 Aug 2017): 2.38 (KLCI : 1,769.49) Price Target 12-mth: 3.35 (41% upside) (Prev 3.50) Analyst Chong Tjen-San, CFA tjensan@alliancedbs.com What s New 2Q17 results below expectations due to poorer port and Malakoff earnings Listing of ports and MRT Line 3 are key catalysts We cut our FY17-18F earnings BUY, TP lowered to 3.35 Price Relative Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 (LHS) Relative KLCI (RHS) Relative Index Forecasts and Valuation FY Dec ( m) 2016A 2017F 2018F 2019F Revenue 4,627 3,185 3,454 3,631 EBITDA 1,835 1,666 1,789 1,879 Pre-tax Profit Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) 76.5 (27.0) EPS (sen) EPS Pre Ex. (sen) EPS Gth Pre Ex (%) 76 (27) Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): (23) (12) N/A Consensus EPS (sen): Other Broker Recs: B: 6 S: 0 H: 1 Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P Deep value conglomerate Unlocking value via listing. MMC is a conglomerate which is currently trading at a 60% discount to our SOP value. It has adopted the strategy of listing its key businesses, starting with Gas Malaysia in 2012 and Malakoff in 2015, to unlock value. It is looking to list its port division in 2018/19. This should provide at least a floor value for MMC. Where we differ. Our TP is significantly higher than consensus, despite assigning a 40% discount to our SOP value. We think this priced in adequate holding company discount and potential concerns of corporate governance issues. Based on Gas Malaysia and Malakoff s market value, the market is assigning an unfair value to the unlisted businesses ports, construction, the sole airport in Johor, water concession, and 4,556-acre land in Johor. But this strategy of IPO has also led to valuation issues for the group, where the listing of Malakoff was arguably done at premium valuations that eventually widened the holding company discount. Key catalysts. The market acknowledges MMC s positioning as a deep value conglomerate. The pricing of its future assets via an IPO and better earnings delivery will be crucial in order to narrow the steep discount to SOP. MMC should also get better recognition as an infrastructure proxy with outstanding orderbook of c.20bn. Together with its JV partner, Gamuda it is front runner for MRT Line 3. Valuation: Our valuation of MMC is based on SOP, given the diversified business model valuing its ports at DCF, Malakoff at market value, Gas Malaysia at our TP and land at a discount to market prices. We have assigned a 40% discount to SOP. Key Risks to Our View: Corporate governance and related-party transactions pose the biggest risk for MMC, in our view; the SATS purchase in 2008 saw the share price being punished severely. Also, in 2009, MMC s major shareholder Syed Mokthar made donations from his stable of companies under a corporate social responsibility programme, to Albukhary International University in Alor Setar. At A Glance Issued Capital (m shrs) 3,045 Mkt. Cap (m/us$m) 7,247 / 1,698 Major Shareholders (%) Seaport Terminal 51.8 Skim Amanah Saham 20.5 Free Float (%) m Avg. Daily Val (US$m) 0.27 ICB Industry : Utilities / Gas; Water & Multiutilities Refer to important disclosures at the end of this report ed: CK / sa:bc

2 WHAT S NEW Lower port and energy earnings 2Q17 results below expectations: Poorer port and Malakoff earnings coupled with absence of land sale gain resulted in poorer earnings for 1H17. Cutting earnings: We lower our FY17-18F earnings to factor in lower throughput for its port business as well as poorer energy and utility earnings. BUY, TP tweaked lower to Our TP factors in a 40% discount to SOP value. 2Q17 results below expectations. MMC booked a 2Q17 net profit of 63m (-50% y-o-y and +14% q-o-q), bringing 1H17 net profit to 118m (-33% y-o-y). The poorer numbers were due to lower port earnings, outages at Tanjung Bin Energy s power plant and the absence of land sale gain at Senai Airport Free Industrial Zone that took place in 1H16. Overall, this was below our forecast and consensus estimate. Lower port earnings. For transport & logistics, 1H17 turnover rose 5% to 1,417m but pretax profit fell 2% y-o-y to 242m. PTP contributed 42%, Johor Port 26% and NCB 32% of 2Q17 revenue. The higher revenue was driven by higher handling activities from RAPID Material Offloading Facility at Johor Port but offset by lower contribution from PTP. Throughput at PTP for 1H17 was 4.14m TEU (-4% y-o-y) but 2Q17 throughput picked up sequentially. The y-o-y decline was due to change in network strategies by certain customers where there was less emphasis on transhipment cargo. Johor Port s overall performance was also lower, with total throughput for 1H17 declining 3% to 8.8m FWT. Dry and break bulk both shed 6% and 40% y-o-y to 2.13m FWT and 0.34m FWT respectively. Liquid bulk rose 2% y-o-y to 6.32m FWT. Its container business for 1H17 chalked a 5% growth y- o-y to 0.42m TEU. Poor Malakoff numbers. 1H17 pretax profit from energy & utilities came in at 100m (-5% y-o-y). Malakoff s numbers for 1H17 was impacted by lower contribution from Tanjung Bin Energy s power plant in YTD17 and insurance claim on rotor replacement. But this was offset by higher fuel margin and higher contribution from associates. Malakoff s financials in FY17 will be impacted by the lower capacity payment in the new revised Segari Energy Ventures Sdn Bhd s Power Purchase Agreement commencing 1 July Gas Malaysia reported stronger 1H17 revenue and pretax profit due to higher volume of gas sold and upward revision of natural gas tariff. Construction earnings lower y-o-y. Its construction division pretax profit for 1H17 was 85m (-23% y-o-y) as MRT Line 1 has been substantially completed while MRT Line 2 has yet to contribute meaningfully. The elevated and tunnelling portion of MRT Line 2 has reached 8.9% and 13.5% progress completion respectively. Lowering earnings and TP. We are cutting our FY17F and 18F net earnings by 23% and 12% to 401m and 498m respectively. This is to factor in the lower energy and utility and port earnings. Consequently, our TP inches down to 3.35 from 3.50 previously as we pencil in the lower earnings and adjust the values of Malakoff and Gas Malaysia. We have used a similar 40% discount to SOP to arrive at our TP. As for Northport, total container and conventional volumes for 1H17 were flat at 1.57 TEU and 3.93m FWT respectively. Page 2

3 Quarterly / Interim Income Statement (m) FY Dec 2Q2016 1Q2017 2Q2017 % chg yoy % chg qoq Revenue (0.6) 2.1 Cost of Goods Sold (568) (566) (591) Gross Profit (7.6) (1.5) Other Oper. (Exp)/Inc (199) (214) (227) Operating Profit (31.2) (13.1) Other Non Opg (Exp)/Inc nm nm Associates & JV Inc Net Interest (Exp)/Inc (127) (121) (118) Exceptional Gain/(Loss) nm nm Pre-tax Profit (29.4) 13.2 Tax (14.2) (26.9) (30.4) Minority Interest (8.9) (10.4) (11.3) (27.1) 8.7 Net Profit (49.7) 14.1 Net profit bef Except (49.7) 14.1 EBITDA (19.0) 4.3 Margins (%) Gross Margins Opg Profit Margins Net Profit Margins Source of all data: Company, AllianceDBS Page 3

4 CRITICAL DATA POINTS TO WATCH Critical Factors Cleaner balance sheet. The Malakoff listing has resulted in interest savings for MMC, arising from the removal of 18bn debt from its balance sheet, and full redemption of its Junior Sukuk Musharakah with 1.8bn proceeds from the public issue. Without this, there would have been a steep step-up in profit rate from 6.3% to 9.3%. Nonetheless, the holding company debt has increased with the privatisation of NCB and acquisition of Penang Port. Further expansion at Malakoff. The goal is to expand total generation capacity to 10,000MW by 2020, and increase water production capacity by 150%. This will be achieved by expanding generation capacity at Tanjung Bin by 1,000MW by 2016, and through acquisitions, with or without partners. It is currently discussing with Petronas to participate in a 1,300MW cogeneration power plant in RAPID, a 1,000MW coal-fired power plant in Tanjung Bin to export power to Singapore, and a new 1,000MW coal-fired power plant in the Northern Peninsular to export power to Thailand. Besides this, it also owns 400ha of land adjacent to the existing power plants for extension. Ports listing. MMC is looking to list its port division in 2018/19. At present, PTP and Johor Port are held under MMC Corp while MMC Ports Sdn Bhd, a wholly-owned SPV, was used to acquire NCB and more recently Penang Port (49% stake). We understand PTP and Johor Port will eventually be transferred to MMC Ports. Hence, the total portfolio size will involve up to four ports. The ultimate game plan for the Penang Port acquisition is to have more complete portfolio of port assets, pursuant to a listing tentatively slated for It is likely that MMC will acquire the balance 51% stake in Penang Port prior to the port listing. What is crucial now is to focus on turning around NCB, particularly its logistics business. Northport is undergoing an expansion involving Berth 8, which will see total annual container capacity increasing by 11% to 6.2m. It also received a 15% tariff increase (largely for terminal handling charges) which was effective from 15 November 2015 (Phase 1), with another increase on 1 September 2018 (Phase 2) Port throughput - PTP (m TEU) Container - Johor Port (m TEU) EBIT Transport & Logistics Construction and Engineering profit Large-cap infrastructure proxy. MMC has been growing its orderbook exponentially over the past few years, with an impressive outstanding orderbook of 20bn currently. The largest project remains MRT Line 2 PDP and tunnelling portion worth an estimated 15.47bn or 7.7bn for its 50% share. We are also encouraged that it has managed to secure projects outside of JV partner Gamuda. The most significant being the 12.8bn PDP role for the Sabah portion of Pan Borneo Highway where it has a 20% interest in a consortium. 0.0 Source: Company, AllianceDBS Page 4

5 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Company Guide Appendix 1: A look at Company's listed history what drives its share price? MMC s share price performance Indexed MMC MK Steel Price FBMKLCI FBMHS Index MMC EPS (rhs) Contract wins Langat 2 project PDP MRT 2 MRT 2 tunneling and PDP for Pan Borneo Sabah Given its conglomerate structure and strategy to list its subsidiaries, MMC s share price performance appears to be driven by its listed associate companies, namely Gas Malaysia and Malakoff. There is some correlation with contract flows where it showed a minor re-rating upon winning the MRT Line 2 tunnelling contract and PDP for Pan Borneo Sabah in March and April 2016 respectively. Page 5

6 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 1-May-15 1-Jun-15 1-Jul-15 1-Aug-15 1-Sep-15 1-Oct-15 1-Nov-15 1-Dec-15 1-Jan-16 1-Feb-16 1-Mar-16 1-Apr-16 1-May-16 1-Jun-16 1-Jul-16 1-Jun-12 1-Oct-12 1-Feb-13 1-Jun-13 1-Oct-13 1-Feb-14 1-Jun-14 1-Oct-14 1-Feb-15 1-Jun-15 1-Oct-15 1-Feb-16 1-Jun-16 Company Guide MMC s share price performance vs Gas Malaysia MMC (LHS) Gas Malaysia (RHS) Remarks MMC s share price exhibits a positive correlation of 0.6x with Gas Malaysia s share price. Gas Malaysia is a 31% associate of the group and contributed an estimated 9% of group earnings for FY16F. Our analyst who has a HOLD rating on Gas Malaysia believes its earnings growth outlook will remain subdued in the near term given the moderation in gas consumption growth from industrial players. This segment s demand is the key earnings driver for Gas Malaysia (GMB) under the gas cost passthrough mechanism that has been in place since Jan MMC s share price performance vs Malakoff MMC (LHS) Malakoff (RHS) MMC exhibits a stronger positive correlation of 0.81x with Malakoff s share price. Malakoff is a 38% associate of the group and contributed an estimated 25% of group earnings for FY16F. Malakoff s share price has corrected significantly YTD due largely due to poorer-than-expected earnings delivery. A meaningful re-rating of Malakoff s share price would see MMC s share price follow suit. MMC s share price vs PTP throughput MMC Price (LHS) PTP (RHS) There appears to be no more meaningful correlation between MMC s share price and both PTP and Johor Port s throughput. This may change following the listing of its ports business where the disclosure may be more transparent and easier to track. MMC s share price vs Johor Port throughput MMC Price (LHS) Johor (RHS) Source: Company, Bloomberg, AllianceDBS Page 6

7 MMC SOP Value V aluation Method Stak e V alue V alue/share m % m Ports - PTP DCF , Johor Port DCF , NCB Acq Price , Energy and Utilies - Malakoff IPP assets Market price , Gas Malaysia At our TP , Concessions -Smart DCF SATS Acquisition price Engineering and Construction MRT - Tunneling DCF and PE , MRT - PDP Fees DCF and PE , Others DCF and PE Various Raw land - Tanjung Bin Land Market price , Tanjung Bin - Vitol Lease price Senai Land Market price , Senai land leased/sold t Lease price Other listed companies - Zelan 78.9 Market price Sime Darby Market price Aliran Ihsan Takeover price Subtotal 21,979.1 Less Holding Co debt (4,978.0) -1.6 SOP Value 17,001.1 Number of shares (m) 3,045.1 SOP Value/share (/share) 5.58 Target Price (/share) 3.35 Source: AllianceDBS Page 7

8 Balance Sheet: Stronger balance sheet. The Malakoff listing had a major impact on MMC s balance sheet, removing 18.2bn worth of debt because its 51% stake has been reduced to 38% and it no longer needs to consolidate the debt. Nonetheless, gearing levels will be on the rise. The total acquisition cost of NCB, including the earlier tranches from MISC, Lembaga Pelabuhan Klang and KWAP as well as the MGO, will cost MMC about 1.8bn. 100% acquisition of Penang Port will likely be c.450m. Share Price Drivers: Re-rating of Malakoff. The re-rating of Malakoff, and to a lesser extent, Gas Malaysia, could also see a corresponding increase in MMC s share price, given there is an intrinsic value for the listed status. Construction franchise. With the eventual listing of its ports business, MMC s listing status should be weaker and the holding company discount should widen. In our view, this is only partially true; MMC is already trading at a huge discount to its SOP value. Nonetheless, it is continuously trying to beef up the construction franchise and will be more aggressive in bidding for jobs without its regular partner Gamuda. Smaller holding company discount? MMC is currently trading at a steep discount to our SOP value. Theoretically, with the listing of Malakoff, the discount should widen. However, this might not apply to MMC as the listing of its prized assets, Gas Malaysia in 2012 and now Malakoff, has provided a floor valuation for MMC, which has reduced the discount. Having said that, we think MMC needs to price its future listings more appropriately to avoid further widening the holding company discount. Key Risks: Corporate governance and related-party transactions pose the biggest risk for MMC, in our view; the SATS purchase in 2008 saw the share price being punished severely. Also, in 2009, MMC s major shareholder Syed Mokthar made donations from his stable of companies under a corporate social responsibility programme, to Albukhary International University in Alor Setar. Company Background MMC is a utilities and infrastructure group with core businesses under the divisions of ports & logistics (Port Tanjung Pelepas, SMART Motorway), energy & utilities (Malakoff, Gas Malaysia), and engineering & construction (infrastructure projects, Mass Rapid Transit). Leverage & Asset Turnover (x) Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure m Capital Expenditure (-) ROE (%) 20.0% 15.0% 10.0% 5.0% 0.0% 26.4 Forward PE Band (x) (x) sd: 24x sd: 20.6x Avg: 17.1x sd: 13.6x sd: 10.1x 8.4 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 PB Band (x) (x) sd: 1.26x sd: 1.07x 1.0 Avg: 0.88x 0.8-1sd: 0.69x 0.6-2sd: 0.5x 0.4 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Source: Company, AllianceDBS Page 8

9 Key Assumptions FY Dec Port throughput - PTP (m TEU) Container - Johor Port (m TEU) EBIT Transport & Logistics Construction and Engineering profit Segmental Breakdown FY Dec Revenues (m) Transport & Logistics 1,907 2,735 2,767 2,994 3,125 Energy & Utilities Engineering & 964 1, Others Total 3,010 4,627 3,185 3,454 3,631 Income Statement (m) FY Dec Revenue 3,010 4,627 3,185 3,454 3,631 Cost of Goods Sold (1,832) (2,862) (1,956) (2,098) (2,181) Gross Profit 1,179 1,765 1,228 1,356 1,450 Other Opng (Exp)/Inc (638) (901) (720) (781) (821) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (260) (441) (336) (310) (299) Exceptional Gain/(Loss) 1, Pre-tax Profit 1, Tax (79.1) (71.8) (152) (189) (214) Minority Interest (150) (51.3) (55.1) (69.3) (70.6) Preference Dividend Net Profit 1, Net Profit before Except EBITDA 1,521 1,835 1,666 1,789 1,879 Growth Revenue Gth (%) (65.7) 53.7 (31.2) EBITDA Gth (%) (44.4) 20.7 (9.2) Opg Profit Gth (%) (70.5) 59.9 (41.2) Net Profit Gth (Pre-ex) (%) (36.8) 76.5 (27.0) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Source: Company, AllianceDBS Page 9

10 Quarterly / Interim Income Statement (m) FY Dec 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 Revenue , Cost of Goods Sold (568) (530) (1,207) (566) (591) Gross Profit Other Oper. (Exp)/Inc (199) (163) (270) (214) (227) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (127) (123) (121) (121) (118) Exceptional Gain/(Loss) Pre-tax Profit Tax (14.2) (9.0) (19.5) (26.9) (30.4) Minority Interest (8.9) (9.3) (18.0) (10.4) (11.3) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) 1.5 (6.5) (50.0) 2.1 EBITDA Gth (%) 29.1 (10.2) 72.8 (50.0) 4.3 Opg Profit Gth (%) (61.3) (13.1) Net Profit Gth (Pre-ex) (%) (15.3) (79.4) 14.1 Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (m) FY Dec Net Fixed Assets 8,072 8,384 8,163 7,941 7,720 Invts in Associates & JVs 4,796 4,867 5,304 5,796 6,324 Other LT Assets 5,444 5,565 5,565 5,565 5,565 Cash & ST Invts 1,173 1,225 1,855 2,130 2,367 Inventory Debtors 1,519 2,283 1,592 1,727 1,815 Other Current Assets Total Assets 21,778 22,700 23,246 23,950 24,621 ST Debt 1,356 1,492 1,492 1,492 1,492 Creditor 1,808 1,960 2,058 2,294 2,433 Other Current Liab LT Debt 7,387 7,555 7,555 7,555 7,555 Other LT Liabilities 1,217 1,414 1,414 1,414 1,414 Shareholder s Equity 9,047 9,527 9,791 10,152 10,588 Minority Interests Total Cap. & Liab. 21,778 22,700 23,246 23,950 24,621 Non-Cash Wkg. Capital (31.4) Net Cash/(Debt) (7,570) (7,822) (7,192) (6,916) (6,680) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Source: Company, AllianceDBS Page 10

11 Cash Flow Statement (m) FY Dec Pre-Tax Profit 1, Dep. & Amort Tax Paid (44.0) (6.9) (22.7) (152) (189) Assoc. & JV Inc/(loss) (259) (249) (436) (492) (529) Chg in Wkg.Cap. 980 (241) Other Operating CF (2,146) (39.8) Net Operating CF 1, , Capital Exp.(net) (818) (498) (500) (500) (500) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF (3,667) Net Investing CF (4,485) (29.8) (500) (500) (500) Div Paid (172) (146) (137) (137) (137) Chg in Gross Debt Capital Issues Other Financing CF (802) (511) Net Financing CF 16.2 (389) (137) (137) (137) Currency Adjustments 73.7 (387) Chg in Cash (3,271) Opg CFPS (sen) Free CFPS (sen) Source: Company, AllianceDBS Target Price & Ratings History S.No. Date of Report Closing Price 12-mth T arget Price Rating 1: 24 Nov BUY 2: 14 Feb BUY 3: 01 Mar BUY 4: 04 Apr BUY 5: 30 May BUY Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Note : Share price and Target price are adjusted for corporate actions. Source: AllianceDBS Analyst: Chong Tjen-San Page 11

12 DISCLOSURE Stock rating definitions STRONG BUY - > 20% total return over the next 3 months, with identifiable share price catalysts within this time frame BUY - > 15% total return over the next 12 months for small caps, >10% for large caps HOLD - -10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps FULLY VALUED - negative total return > -10% over the next 12 months SELL - negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame Commonly used abbreviations Adex = advertising expenditure EPS = earnings per share PBT = profit before tax bn = billion EV = enterprise value P/B = price / book ratio BV = book value FCF = free cash flow P/E = price / earnings ratio CF = cash flow FV = fair value PEG = P/E ratio to growth ratio CAGR = compounded annual growth rate FY = financial year q-o-q = quarter-on-quarter Capex = capital expenditure m = million = Ringgit CY = calendar year M-o-m = month-on-month ROA = return on assets Div yld = dividend yield NAV = net assets value ROE = return on equity DCF = discounted cash flow NM = not meaningful TP = target price DDM = dividend discount model NTA = net tangible assets trn = trillion DPS = dividend per share NR = not rated WACC = weighted average cost of capital EBIT = earnings before interest & tax p.a. = per annum y-o-y = year-on-year EBITDA = EBIT before depreciation and amortisation PAT = profit after tax YTD = year-to-date Page 12

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