gsg_stock discussion

Stockwatch- MMC (Malaysia) RM5.25 Macquarie initiate coverage

Spicy infrastructure play

Event

We initiate coverage on MMC Corp with an Outperform rating and a RM6.75 target price, providing a 47% upside from current levels.

Impact
1. Malaysia’s largest infrastructure play. MMC will likely become Malaysia’s largest infrastructure play with 75-80% of its earnings coming from power, gas distribution and ports. The inclusion of Malakoff’s (MAL MK, RM10.00, Neutral, TP: RM10.35) assets from mid-1Q07, implies that 50% of pretax earnings will likely be derived from power generation. Further upside to infrastructure earnings could come from the award of port and power plant projects within the Jizan Economic City project in Saudi Arabia.

2. Earnings boost from local and foreign construction projects. MMC should be a beneficiary of increased construction-based spending under the 9th Malaysia plan (9MP). At the very least we see MMC together with joint – venture partner Gamuda (GAM MK, RM5.75, Outperform, TP: RM6.30) winning the RM10bn northern section double-tracking rail project, which would
contribute about RM444m to earnings between FY07-10. The US$30bn Jizan project meanwhile should provide more construction-based earnings although at this time they are not incorporated into our estimates.

3. IPP restructuring – room for valuation upside. We believe the conclusion of the IPP restructuring process by mid-2007 should allow for further upside to our valuation of MMC. While every 10% reduction in capacity payments to Gen-1 plants would lead to a 3% reduction in MMC’s FY08 earnings, we believe the extension of PPA concessions would provide NPV upside.

Earnings revision
1. We are currently establishing base forecasts.

Price catalyst
1. 12-month price target: RM6.75 based on a PER methodology.
2. Catalyst: Resolution of the IPP restructuring process and award of the doubletracking project to MMC would be major catalysts over the next 12 months.

Action and recommendation
1. We initiate on MMC with an Outperform recommendation.
2. At 9x FY08E PER and 6x EV/EBITDA, MMC trades at a discount to its various peer groups (13-17x PER and 8-12x EV/EBITDA) as well as the Malaysian market at 14x FY0-8 PER. The company meanwhile offers a 44% FY06-09 EPS CAGR.
3. MMC fits in well with our key Hunting Stock themes of increased government spending and increased domestic demand. As spending under the 9MP takes off, expect MMC’s earnings and valuations to follow suit.

posted by gsg @ 6:14 PM