Weakness continues into 2Q MMC reported a lacklustre set of earnings for 1H17, as PATAMI of RM118m (-3 yoy) was below expectations. 1H17 results constituted 22% of our and consensus full year forecast. Although MMC did managed to deliver a 14% qoq growth in 2Q, it is still tracking below our expectation, due to flattish performance from it port operations, weaker revenue recognition from its construction business and a higher effective tax rate for the group. We downgrade our call to HOLD as we lower our TP to RM2.60. Port Higher cost continue to be a drag Volatility in fuel cost continues to hamper MMC s port operations, as revenue grew by 4.4% yoy for 1H17, but PBT contracted by more than 2% yoy. Apart from Port of Tanjung Pelapas (PTP), which recorded a flat revenue growth, all the other ports in MMC s portfolio managed to deliver a decent revenue growth for 1H. However, due to the lacklustre performance in the 1H17, we have lowered our estimates for the segment by 4%. Engineering & construction (E&C) Progressing not fast enough Despite gaining better earnings momentum in 2Q for E&C, its progress is still tracking behind our schedule. As a result, we lower the estimates by more than 30% for the segment. Although we are of the view that revenue would pick up in the coming quarters, as construction work starts to gain momentum, the progress for the 1H17 is tracking too far behind our expectation which leads to the significant earnings revision. 2Q PBT for the segment is up 2.4x qoq, but is down by 25% yoy to RM60m (1HFY17 RM85m vs 1HFY16 RM110m). Downgrade to HOLD with a lowered TP at RM2.60 While core operations have disappointed us at the PBT level, the overall PATAMI was also negatively impacted by a higher effective tax rate, which led us to lower our EPS forecast for FY17E-19E substantially by 18%-38%. We have downgraded our call to HOLD on the back of lower TP at RM2.60. Earnings & Valuation Summary FYE 31 Dec 2015 2016 2017E 2018E 2019E Revenue (RMm) 5,056.9 4,627.4 4,094.8 4,341.3 4,937.3 EBITDA (RMm) 3,022.8 1,337.3 1,133.5 1,213.3 1,350.4 Pretax profit (RMm) 1,969.5 672.7 450.7 588.4 782.7 Net profit (RMm) 1,664.4 549.7 335.1 446.5 604.8 EPS (sen) 54.7 18.1 11.0 14.7 19.9 PER (x) 4.4 13.2 21.6 16.2 12.0 Core net profit (RMm) 1,664.4 549.7 335.1 446.5 604.8 Core EPS (sen) 54.7 18.1 11.0 14.7 19.9 Core EPS growth (%) 284.8 (67.0) (39.0) 33.3 35.5 Core PER (x) 4.4 13.2 21.6 16.2 12.0 Net DPS (sen) 3.8 4.0 4.0 4.0 4.0 Dividend Yield (%) 1.6 1.7 1.7 1.7 1.7 EV/EBITDA (x) 5.0 11.2 13.3 12.4 11.1 Results Note MMC MMC MK Sector: Utilities RM2.38 @ 28 Aug 2017 HOLD (downgrade) Upside: 9% Price Target: RM2.60 Previous Target: RM2.80 (RM) 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Price Performance 1M 3M 12M Absolute 0.0% -4.8% 1. Rel to KLCI -0.1% -4.6% -3.7% Stock Data Issued shares (m) 3,045 Mkt cap (RMm)/(US$m) 7,247/1,698 Avg daily vol - 6mth (m) 1.1 52-wk range (RM) 2.19-2.65 Est free float 14.2% BV per share (RM) 3.15 P/BV (x) 0.76 Net cash/ (debt) (RMm) (7,986) ROE (2017E) 3.7% Derivatives No Shariah Compliant Yes Key Shareholders Seaport Terminal Johor 51.8% Skim Amanah Saham 18.2% Lembaga Tabung Haji 7. Employees Provident Fund Source: Affin Hwang, Bloomberg 5.2% Ng Chi Hoong (603) 2146 7470 chihoong.ng@affinhwang.com Chg in EPS (%) (38.4) (34.6) (18.0) Affin/Consensus (x) 0.7 0.8 0.8 Source: Company, Affin Hwang forecasts, Bloomberg Page 1 of 5
Risk to our call Key upside risk to our call include: 1) Land sales from its Senai Airport Free Industrial Zone; 2) Better recognition of construction progress; and 3) Significantly lower effective tax rate in the 2H. Key downside risk to our call include: 1) Drop in trade volume for the ports; 2) Slower recognition of the construction progress; and 3) Significantly higher effective tax rate in the 2H. Fig 1: Results Comparison FYE 31 Dec (RMm) 2Q17 QoQ YoY 1H17 YoY Comments % chg % chg % chg Revenue 944.4 2.1 (0.6) 1,869.7 (0.9) Weaker lower revenue from E&C segment Op costs (821.5) 5.3 2.8 (1,601.5) 2.8 EBIT 123.0 (15.3) (18.8) 268.2 (18.3) EBIT margin (%) 13.0-2.7ppt -2.9ppt 14.3-3.1ppt Negatively impacted by lower profitability in both port and E&C segment Int expense (118.0) (2.5) (6.9) (239.0) (2.1) Associates/JVs 96.5 41.2 5.3 164.9 12.8 Part of the construction profit for the MMC- Gamuda JV is recognised under profits from JV Exceptional items 3.1 nm (90.2) 2.9 (77.9) Disposal of non-core PPE Pretax profit 104.6 13.2 (29.4) 197.0 (19.1) Tax (30.4) 13.1 114.3 (57.3) 32.4 Tax rate (%) 29.1 0.0ppt +19.5ppt 29.1 +11.3ppt Minority interests (11.3) 8.7 27.1 (21.6) (9.8) Net profit 62.9 14.1 (49.7) 118.1 (33.1) Impacted by the higher effective tax rate for the 1H17 Core NP 59.8 8.1 (35.9) 115.2 (29.5) Source: Affin Hwang, Company data Page 2 of 5
Fig 2: RNAV composition of MMC RNAV Segmental Ports Stake (%) Value Value to MMC (RMm) - Johor Port 100.0% 1,162 1,162 - Port of Tanjung Pelepas 70.0% 955 668 - NCB 99.0% 1,415 1,401 Comment - Red Sea Gateway Terminal 20.0% 840 168 PER at 10x 3,399 Energy & utilities - Malakoff 37.6% 6,250 2,350 - Gas Malaysia 30.9% 3,839 1,186 3,536 Engineering & construction - MMC Engineering & Construction 100.0% 108 108 6x PER - MMC & Gamuda JV 50.0% 11,252 5,626 DCF at WACC of 5.85% (TP: RM1.25, BUY) DDM at WACC of 7.8% (TP: RM2.99, HOLD) MRT PDP & Construction at 16x PE, SMART is based on DCF - UEM & MMC JV 50.0% 129 64 6x PER - Zelan 39.2% 131 51 Market Value (RM0.155/shr) 5,850 Others Senai Airport City 100.0% 2,264 2,264 RM30/psf on the remaining 2,079 acres Subtotal Gross RNAV 15,049 -) Group net debt -5,507 As of 31 Dec 2016 Total Gross RNAV 9,542 Holding co discount 20% -1,908 Total Net RNAV 7,633 Net RNAV / share 2.60 # of shares (mn) 3,045 Source: Company Data, Affin Hwang forecasts Page 3 of 5
MMC FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins FYE 31 Dec (RMm) 2015 2016 2017E 2018E 2019E FYE 31 Dec (RMm) 2015 2016 2017E 2018E 2019E Revenue 5,056.9 4,627.4 4,094.8 4,341.3 4,937.3 Grow th Operating expenses (2,034.1) (3,290.1) (2,961.3) (3,128.0) (3,586.9) Revenue (%) (42.3) (8.5) (11.5) 6.0 13.7 EBITDA 3,022.8 1,337.3 1,133.5 1,213.3 1,350.4 EBITDA (%) (3.4) (55.8) (15.2) 7.0 11.3 Depreciation (711.7) (466.7) (444.2) (447.0) (449.7) Core net profit (%) 237.6 (67.0) (39.0) 33.3 35.5 EBIT 2,311.0 870.6 689.3 766.3 900.7 Net int inc/(exp) (616.1) (447.0) (454.7) (452.9) (452.1) Profitability Associates' contribution 274.7 249.1 216.1 274.9 334.1 EBITDA margin (%) 59.8 28.9 27.7 27.9 27.4 Exceptional items - - - - - PBT margin (%) 38.9 14.5 11.0 13.6 15.9 Pretax profit 1,969.5 672.7 450.7 588.4 782.7 Net profit margin (%) 32.9 11.9 8.2 10.3 12.3 Tax (153.5) (71.8) (67.6) (88.3) (117.4) Effective tax rate (%) 7.8 10.7 15.0 15.0 15.0 Minority interest (151.6) (51.3) (48.0) (53.6) (60.5) ROA (%) 8.9 2.9 1.7 2.3 3.0 Net profit 1,664.4 549.7 335.1 446.5 604.8 Core ROE (%) 18.4 5.8 3.4 4.4 5.7 ROCE (%) 18.4 5.8 3.4 4.4 5.7 Balance Sheet Statement Dividend payout ratio (%) 7.0 22.2 36.4 27.3 20.1 FYE 31 Dec (RMm) 2015 2016 2017E 2018E 2019E Fixed assets 8,079.3 8,384.2 8,440.0 8,493.0 8,543.4 Liquidity Other long term assets 10,216.0 10,432.2 10,648.3 10,923.2 11,257.3 Current ratio (x) 1.2 1.1 1.1 1.1 1.2 Total non-curr assets 18,295.2 18,816.5 19,088.3 19,416.3 19,800.7 Op. cash flow (RMm) 3,022.8 1,337.3 1,133.5 1,213.3 1,350.4 Free cashflow (RMm) 214.8 360.1 174.2 143.1 210.4 Cash and equivalents 1,299.6 1,224.6 1,277.0 1,298.2 1,386.8 FCF/share (sen) 7.1 11.8 5.7 4.7 0.0 Stocks 467.0 224.9 199.0 211.0 239.9 Debtors 1,544.2 2,282.7 2,020.0 2,141.6 2,435.6 Asset management Other current assets 164.1 150.9 150.9 150.9 150.9 Debtors turnover (days) 111.5 180.1 180.1 180.1 180.1 Total current assets 3,474.9 3,883.1 3,646.9 3,801.7 4,213.2 Stock turnover (days) 33.7 17.7 17.7 17.7 17.7 Creditors turnover (days) 115.0 154.6 154.6 154.6 154.6 Creditors 1,593.0 1,960.1 1,734.5 1,838.9 2,091.3 Short term borrow ings 1,354.1 1,491.8 1,491.8 1,491.8 1,491.8 Capital structure Other current liabilities 36.3 52.0 52.0 52.0 52.0 Net gearing (%) 82.2 82.1 79.8 77.0 72.6 Total current liab 2,983.3 3,503.8 3,278.2 3,382.6 3,635.1 Interest cover (x) 4.9 3.0 2.5 2.7 3.0 Long term borrow ings 7,386.6 7,554.6 7,554.6 7,554.6 7,554.6 Other long term liabilities 1,415.4 1,414.3 1,414.3 1,414.3 1,414.3 Quarterly Profit & Loss Total long term liab 8,802.0 8,968.9 8,968.9 8,968.9 8,968.9 FYE 31 Dec (RMm) 2Q16 3Q16 4Q16 1Q17 2Q17 Revenue 950.3 888.8 1,852.1 925.2 944.4 Shareholders' Funds + MI 9,984.9 10,226.9 10,488.2 10,866.5 11,410.0 Operating expenses (798.8) (744.5) (1,499.7) (780.0) (821.5) EBIT 151.5 144.3 352.4 145.2 123.0 Cash Flow Statement Int expense (126.7) (122.6) (121.5) (121.0) (118.0) FYE 31 Dec (RMm) 2015 2016 2017E 2018E 2019E Associates' contribution 91.6 51.6 51.4 68.4 96.5 EBIT 2,311.0 870.6 689.3 766.3 900.7 Exceptional items 31.7 50.9 22.7 (0.2) 3.1 Depreciation & amortisation 711.7 466.7 444.2 447.0 449.7 Pretax profit 148.1 124.1 305.0 92.4 104.6 Working capital changes 622.5 (129.3) 63.0 (29.2) (70.5) Tax (14.2) (9.0) (19.5) (26.9) (30.4) Cash tax paid (153.5) (71.8) (67.6) (88.3) (117.4) Minority interest 0.0 0.0 0.0 0.0 0.0 Others (2,439.1) (278.5) (454.7) (452.9) (452.1) Net profit 133.9 115.2 285.4 65.5 74.2 Cashflow frm operation 1,052.6 857.6 674.2 643.1 710.4 Core net profit 102.2 64.3 262.7 65.7 71.1 Capex (837.9) (497.6) (500.0) (500.0) (500.0) Disposal/(purchases) 0.0 0.0 0.0 0.0 1.0 Margins (%) Others (4,001.4) 467.8 0.0 0.0 (1.0) EBIT 15.9 16.2 19.0 15.7 13.0 Cash flow frm investing (4,839.3) (29.8) (500.0) (500.0) (500.0) PBT 15.6 14.0 16.5 10.0 11.1 Debt raised/(repaid) (16,911.3) 305.7 0.0 0.0 0.0 Core net profit 10.8 7.2 14.2 7.1 7.5 Equity raised/(repaid) 0.0 0.0 0.0 0.0 0.0 Net int inc/(exp) 0.0 0.0 0.0 0.0 1.0 Dividends paid (115.7) (121.8) (121.8) (121.8) (121.8) Others 17,242.3 (572.6) 0.0 0.0 (1.0) Cash flow from financing 215.3 (388.7) (121.8) (121.8) (121.8) Free Cash Flow 214.8 360.1 174.2 143.1 210.4 Source: Company, Affin Hwang forecasts Page 4 of 5
Equity Rating Structure and Definitions BUY Total return is expected to exceed +10% over a 12-month period HOLD Total return is expected to be between -5% and +10% over a 12-month period SELL Total return is expected to be below -5% over a 12-month period NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months. OVERWEIGHT Industry, as defined by the analyst s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) ( the Company ) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) A Participating Organisation of Bursa Malaysia Securities Berhad 22nd Floor, Menara Boustead, 69, Jalan Raja Chulan, 50200 Kuala Lumpur, Malaysia. T : + 603 2146 3700 F : + 603 2146 7630 research@affinhwang.com Page 5 of 5