PTP is anticipated to be the main contributor of the overall container throughput growth

by SHAZNI ONG/ pic by TMR FILE

MMC Corp Bhd’s second quarter (2Q) earnings will be driven by growth in its ports throughput and resilient utility business, analysts observed.

MIDF Research said MMC’s 2Q earnings are expected to be higher year-on-year (YoY) and sequentially as it forecast the company’s 2Q normalised profit to be between RM55 million and RM60 million.

“This would represent increases of 10% YoY and 3% quarter-on-quarter (QoQ). We are anticipating a rebound in earnings this year, buttressed by growth in container throughput from its stable of ports,” MIDF Research stated in a research note yesterday.

The Port of Tanjung Pelepas (PTP) is expected to be the main contributor of the overall container throughput growth, with the overall container throughput at MMC-operated ports expected to be higher as Malaysia’s leading economic index is still pointing towards a path of recovery.

“This also suggests that the GDP growth for 2Q may be higher than 1Q, backed by the exports growth of 4% QoQ in 2Q,” MIDF Research said.

The bulk of the growth in container throughput will be underpinned by PTP which constitutes around 60% of MMC’s total container throughput.

Based on data from the Johor Port Authority, PTP grew to the tune of 6% QoQ and 7% YoY to reach around 2.36 million twenty-foot equivalent units, MIDF Research stated.

“The fact that Maersk owns 30% of PTP would shield the port from any effects of reshuffling of alliances seen in Port Klang during the financial year 2017 (FY17),” the research house added.

MIDF Research also noted that concerns about the US-China trade war were negated by resilient demand.

Malaysia’s trade contribution from Asean remained robust at 26.8% in the first six months of 2019, which corroborated with the International Monetary Fund’s 2019 economic growth projection for Asean of 5%, the research house added.

MIDF Research noted that there could be minimal disruption to Malakoff Corp Bhd’s earnings from the acquisition of Alam Flora Sdn Bhd and Malaysian Shoaiba Consortium Sdn Bhd (MSCSB), and expects earnings visibility for MMC’s engineering and construction to remain intact as the group continues to actively bid for new projects.

“On MMC’s associate, Malakoff, we gather that the power purchase agreement for the loss-making Kapar Energy Ventures Sdn Bhd will expire by the end of this year.

“Henceforth, we believe that there will be minimal earnings disruption to Malakoff following the completion of the acquisition of Alam Flora,” the research firm said.

MIDF Research added that the performance of Alam Flora has been commendable in the past few years with a five-year profit before tax (PBT) compound annual growth rate of 12% and PBT margins remaining above 10%.

The acquisition is expected to be completed around 4Q of FY19 following the extension of fulfilling the conditions precedent of the share sale agreement to Jan 31, 2020.

MIDF Research noted that the acquisition of Khazanah Nasional Bhd’s 40% stake in MSCSB for US$70 million (RM288 million) by Malakoff would also better address the potential earnings gap.

The research house added that earnings accretion to Malakoff are expected to be derived from the remaining contract periods of 10 years under Shuaibah Water and Electricity Co Ltd’s power and water purchase agreement and Shuaibah Expansion Project Co’s water purchase agreement indirectly owned by MSCSB.

For Gas Malaysia Bhd, on which MIDF Research has a ‘Buy’ call and target price (TP) of RM3.50, the research house expects its gas sales volume for FY19 to continue to sustain and register YoY growth.

“Our current gas volume growth projection remains between 6% and 6.5%. Our assumption is premised on a resilient GDP growth of 4.5% to 4.7% for 2019.

“Moving forward, we believe that the growth of the gas sales volume will be primarily driven by the rubber, oleo-chemical, consumer products and glass manufacturing industries,” the research house said.

MIDF Research also noted that there is a potential land sale at the Senai Airport City (SAC) in the next few years due to limited land availability in Singapore.

The last sale of land took place in August 2015 whereby three parcels of land totalling 188.7 acres (76.4ha) were sold to I-Park Development Sdn Bhd for RM370 million cash, a price that is more than double its original purchase price of RM140.5 million.

Other occupants and tenants of SAC include Fuji Oil, Hershey’s Chocolate and EcoWorld.

“We do not discount the possibility of a potential land sale to take place in the coming years due to the limited land availability in Singapore, prompting businesses to shift part of their distribution or manufacturing hubs to SAC,” the research firm said.

MIDF Research has maintained its ‘Buy’ call on MMC with an unchanged TP of RM1.31 per share.

It continues to favour MMC due to the valuations supported by the market capitalisation of its listed associates Malakoff and Gas Malaysia, and synergies from the full acquisition of Penang Ports supported by the container terminal business and the cruise terminal operations, in collaboration with Royal Caribbean Cruises Ltd, which will be driven by the growth of tourism in Penang.

“Other catalysts for MMC include the possible reinstatement of the Klang Valley Mass Rapid Transit Line 3 project at a revised cost (possibly half the original price tag of RM45 billion).

“We are confident that MMC will be able to clinch new construction projects which will act as a buffer for its construction orderbook,” the research house said.