MMC may be affected by change in Pan Borneo business model, says research house

The Pan Borneo Highway project in Sabah is about 9% complete. (Bernama pic)

PETALING JAYA: Conglomerate MMC Corp Bhd will likely be affected by the imminent change of business model in the Sabah Pan Borneo Highway project, RHB Research said in a note today.

This comes after Sabah Chief Minister Shafie Apdal said the project delivery partner model would be dropped for a new approach to ensure a more efficient and accountable management of construction costs.

Deputy Works Minister Anuar Tahir was reported as saying the government would reach a decision on the matter by the end of the month.

“MMC has a 20% stake in the project, with Warisan Tarang holding 60% and UEM Group owning the remaining 20%. We value its stake at RM1.21 billion,” RHB said.

The project is currently 9.1% complete, with target handover set for December 2021. The research house said in its base scenario, MMC would still participate in the highway project under a turnkey model, although the exact percentage of ownership and role is unclear.

In a worst case scenario, if MMC is excluded from any role, the earnings risk is RM19 million or 9% of its financial year 2019 net profit. RHB said it would maintain its 2019 net profit projection for the company at RM219 million pending further updates on the issue.

The research house’s target price for the company is RM1.36, assuming the worst case, from RM1.37 previously.

The small impact is due to the the project’s effective remaining order book at MMC of RM1.1 billion, or 10% of the total construction order book.

Its valuation for MMC’s engineering wing only makes up 20% of the total valuation, which is still dominated by ports (contribution to total valuation: 70%).

According to RHB, MMC’s outlook for its ports and logistics business is still good. While the engineering division may face near-term uncertainties, the ports unit’s net profit should enjoy double digit growth due to full-year contributions from Penang port in 2019.

It has a buy recommendation on the company as MMC’s ownership in Malakoff, Gas Malaysia and Senai Airport combined is already worth RM3.68 billion, or RM1.12 per share.

The current market price of RM1.05 is pricing in zero value for all other MMC assets. The most obvious mispricing is the ports operations, which have historically generated steady earnings.

Key risks to its recommendation include weak throughput volumes at its ports, over-gearing for growth, and revision/cancellation of existing construction projects. - FMT