(Jan 10, RM3.07)
Downgrade to trading buy at RM3.10 with target price of RM3.52: Regardless of fresh rumours of MMC making a new bid for PLUS, we see the company as an excellent proxy for an election play, given its exposure to various infrastructure developments under the Economic Transformation Programme. With sentiment being positive on anticipation of the listing of Gas Malaysia and the KL MRT, we cast aside our previous conservatism on the company’s valuation.
Specifically, we attribute 70% of PTP’s (Port of Tanjung Pelepas) ownership and increase the valuation for its Senai and Tanjung Bin landbank. While our sum of parts fair value is increased to RM3.52, our call is downgraded from buy to trading buy as the new valuation incorporates some risk in the form of a higher landbank value, where MMC’s track record is still not proven.
Local media also reported that MMC may put in another bid for PLUS before the Jan 10 deadline of 5pm. While we are uncertain of the validity of these rumours, we note that MMC has plenty of near-term catalysts, with or without the bid.
During the OSK Asean Corporate Day on Jan 6 in Singapore, MMC revealed that it hopes to list Gas Malaysia in 2011. Gas Malaysia, the sole distributor and retailer of natural gas in Malaysia to customers who consume less than 2 million mmBTU per day, sells its gas to parties including rubber glove manufacturers, steelmakers and food and beverage players.
MMC currently owns 41.8% of Gas Malaysia but effectively controls it as a subsidiary. We believe the company would be willing to pare down its stake to 20% as long as it can still equity account Gas Malaysia’s earnings as an associate.
With the Cabinet having agreed to the first line of the KL MRT system, we believe a contract will be awarded by July. The value of the line could potentially be slightly more than 30% of the total RM36 billion for the MRT system. The Gamuda-MMC JV remains focused on its project development partner (PDP) role and is also hoping to secure the MRT’s tunnelling portion. Both the PDP and the tunneling portion have been somewhat factored into our valuation.
MMC remains hopeful that it can secure the 1,000MW power plant extension at its Tanjung Bin site. With ready land and infrastructure in the form of a switchyard next to the expansion site, MMC should be able to put in a good pitch for the RFP, which may be out soon. We have however, yet to factor this into our valuation.
While our fair value has been raised to RM3.52, we are downgrading MMC to a trading buy due to several reasons, including the fact that 30 sen of the RM3.52 is attributed to the increase in land valuation in south Johor. As MMC’s track record of selling/leasing the land there is still patchy, investors will have to bear some risks associated with this 30 sen of value.
Fundamentally, the company’s earnings may still disappoint in 4QFY10, for which the results will be announced next month as there may still be provisions for Zelan and losses at Kapar. We also believe that short-term excitement may boost interest but in the longer term, the company has to prove itself from the fundamental angle. — OSK Research, Jan 10
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