MMC to rerate as large cap proxy to infrastructure and Iskandar M’sia

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KUCHING: MMC Corporation Bhd’s (MMC) shares have been regarded as being overlooked and underappreciated by the investor market as well as being a lagging large cap proxy to the infrastructure sector as well as the Iskandar Malaysia regional development corridor.

Outlining this, HwangDBS Vickers Research Sdn Bhd (HwangDBS Research) pointed out that the lack of large cap liquid infrastructure stocks apart from Gamuda Bhd (Gamuda) and IJM Corporation Bhd (IJM) made MMC stand out as a strong proxy.

“The appetite for Malaysian infrastructure has picked up judging by the surge in Gamuda’s share price, which is up 35 per cent year to date versus two per cent for laggard MMC.

“We have also received more queries from foreign investors but MMC is often overlooked and this is likely due to its lack of coverage and more complex businesses.

“This is not justified given its market cap of US$2.5 billion, decent trading liquidity, orderbook of RM4 billion and strong pipeline ahead,” the research house stated in a report yesterday.

In HwangDBS Research’s view, MMC is poised to clinch RM6 billion worth of new jobs over the next 12 to 18 months, largely to come from the tunneling portion of MRT Line 2 worth RM9 billion, where MMC’s 50 per cent portion is worth RM4.5 billion.

In addition, there is also more upside from its Project Delivery Partner (PDP) role for Line 2, where MMC will also likely receive a fee of six per cent, the research house added.

It pointed out that infrastructure now formed 32 per cent of its revised sum of parts (SOP) valuation and that the stock was also ‘under-owed’ with foreign shareholding at 6.9 per cent versus Gamuda’s 45 per cent.

“Iskandar forms 60 per cent of MMC’s SOP. While the direct beneficiary will be its holding of 4,556 acres of land in Senai and Tanjung Bin, its other assets such as ports and airport will continue to benefit from higher throughput and passenger arrivals.

“Given the success of Vitol in Tanjung Bin, there are three other tank operators which will lease land for RM40 per square foot (psf) – including infrastructure – versus Vitol’s RM20 psf.

“On our estimates, every RM5 psf increase in land price over our new base case of RM28 to RM30 psf will raise the SOP by five per cent.

“Based on the market values of its listed entities, the market is assigning a residual value of RM1.4 billion for its construction, ports, water and Johor land bank. “Putting this in perspective, even at a depressed land price of RM10 psf (most recent transacted price is RM25 to RM30 psf), the land is worth RM2 billion,” the research house pointed out.

It raised its financial years 2014 (FY14) and FY15 forecast earnings to impute in PDP fees of six per cent and the new SOP value of RM6.19 per share now factored in discount cash flow value of the PDP, expectations of just RM1 billion in new orders and higher land values.

“With revisions to our earnings and SOP value, infrastructure now accounts for 21 per cent of FY13 forecast earnings and 32 per cent of SOP valuation,” it said while also revealing a new target price of RM4.95 per share, based on a 20 per cent discount of the SOP.