MMC’s job win brings orderbook sustainability

The real growth in earnings will be driven by its ports operations and railway projects

by SHAZNI ONG / pic by TMR

MMC Corp Bhd’s success of clinching the RM131.4 million gas pipeline engineering, procurement, construction and commissioning (EPCC) contract, while offering minimal earnings accretion, supports its ongoing efforts to ensure a sustainable construction orderbook.

The real growth in earnings will be driven by its ports operations and railway projects including the revised bid for the Mass Rapid Transit Line 3 (MRT3) project, MIDF Research stated in a research note yesterday.

“Recall that MMC is actively proposing a few railway-related projects to several state governments.

“MMC has also put forward alternative solutions for the proposed railway projects which promote better cost efficiency and reduce total cost of ownership by one-third of the normal cost,” the firm said.

MIDF noted this was in addition to the submitted proposal to revise the MRT3 project at a price tag lower than RM45 billion to the government in December last year.

“We believe this could provide earnings visibility for the segment as the Klang Valley Mass Rapid Transit Line 2 (KVMRT2) reaches completion in 2022,” the MIDF noted.

Last Friday, a joint venture (JV) between MMC Engineering & Construction Sdn Bhd (MMCEC), MMC Oil & Gas Engineering Sdn Bhd (MMCOG) and Sedia Engineering Works Sdn Bhd was awarded a RM131.4 million contract by Petronas Gas Bhd’s EPCC works on the PGU-I Gas Pipeline Replacement Project.

MMCEC and MMCOG are indirect, wholly owned subsidiaries of MMC.

In a Bursa Malaysia filing last Friday, MMC stated the project comprises the nominal pipe size 36 pipeline and associated station works for the total length of 33km from Gas Processing Kertih to Bukit Anak Dara Kijal in Kemaman,

Terengganu, and is expected to be completed within 35 months from December this year.

MIDF noted the last time MMC was awarded with a project related to pipeline construction was in the 1990s.

Assuming normal construction project profit before tax (PBT) margins of 10% and accounting for MMC’s 90% share of the JV company, represented by MMCEC and MMCOG, the impact is immaterial for FY19E as expected PBT would be around RM300,000 (less than 0.5% of FY19E PBT).

“Even for FY20F and FY21F, we are estimating an annual earnings accretion of around RM4.1 million which is relatively minimal, making up less than 1.5% of the forecast PBT in those years. The attributable contract value to MMC can be considered insignificant compared to the construction orderbook of circa RM7.2 billion,” MIDF said.

MIDF has revised its FY20F and FY21F earnings upwards for MMC by +1.3 and +1.1% to RM247.4 million and RM289.8 million respectively after imputing the earnings accretion from the EPCC contract.

It left the FY19E earnings unchanged due to the immaterial impact for the year.

“Since the earnings adjustment has minimal impact on the construction segment under our sum-of-the-parts valuation, we are maintaining our target price at RM1.30 per share,” the firm said.

MIDF continues to favour MMC due to the valuation supported by the market capitalisation of its listed associates — Malakoff Corp Bhd and Gas Malaysia Bhd.

“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, will be driven by the growth in tourism in Penang.

Other catalysts for MMC include the possible reinstatement of the KVMRT3 project at a revised cost (possibly half the original price tag of RM45billion),” the firm said.

MIDF remains confident MMC will be able to clinch new construction projects, especially railway projects, which will act as a buffer for its construction orderbook.

Key downside risks to its call on MMC include prolonged global trade tensions, weak container volumes at MMC’s owned ports and downward revision of its listed associates.

MIDF has a ‘Buy’ call on MMC with an unchanged target price of RM1.30 per share.

MMC will be included as a constituent of the FTSE Bursa Malaysia Mid 70 Index effective end trading day on Dec 20, 2019, MIDF added.

MMC shares closed yesterday up one sen at 96.5 sen, giving the group a market capitalisation of RM2.94 billion.