MMC Corporation

PP10551/09/2011(028936) 27 April 2011

MALAYSIA EQUITY Investment Research Daily Company Update Chris Eng +60 (3) 9207 7677 [email protected] MMC Corporation

Syed Mokhtar’s Crown Jewel

TRADING BUY  Despite its sister companies DRB-HICOM and Bernas grabbing headlines and Fair Value RM3.62 generally outperforming the KLCI, MMC, Syed Mokhtar’s crown jewel has been out of Previous RM3.62 investor’s radar screen and underperformed YTD. We believe it will only be a matter Price RM2.62 of time before this situation changes and we reiterate our Trading Buy call on the stock with an unchanged SOP fair value of RM3.62. CONGLOMERATE MMC is a conglomerate which owns the Syed Mokhtar in the news. Tan Sri Dato’ Seri Syed Mokhtar Shah bin Syed Nor (Syed largest independent power producer, the largest container terminal and the largest Mokhtar) has been in the news lately with his companies grabbing headlines. These palm oil port in Malaysia. It also owns a gas include Padini where Syed Mokhtar sold its substantial 28% shareholding, DRB-HICOM distribution company and is developing a where it won the bid to buy 32% of Pos Malaysia and finally Bernas which got its rice US$30bn township in Saudi Arabia. management contract extended. Syed Mokhtar’s companies have generally performed well Stock Statistics in 2011 outperforming the KLCI. See Figures 1 and 2. Bloomberg Ticker MMC MK Share Capital (m) 3045.06 Market Cap (RMm) 7,978.1 The Jewel in the Crown has underperformed. However, this has not been the case for 52 week H│L Price (RM) 3.35 2.20 Syed Mokhtar’s flagship company MMC that has lagged given poor financial results, higher 3mth Avg Vol (‘000) 2,271.3 PER and a lack of newsflow in the new year. With MMC having the largest market cap of YTD Returns -5.8 Beta (x) 1.39 Syed Mokhtar’s companies, we believe it will only be matter of time before it too announces some good news. Major Shareholders (%) Tan Sri Syed Mokhtar 51.76 ASB 16.68 Many potential catalysts. Positive catalysts for MMC include (1) Malakoff securing the EPF 8.98 1000MW extension to Tanjung Bin (2) Gas Malaysia’s listing getting more traction (3) The MMC/Gamuda JV officially securing the tunneling portion of the KL MRT project (4) Syed Share Performance (%) Mokhtar buying Penang Port/Northport/Kuantan Port/Kemaman Port (5) MMC securing the Month Absolute Relative 1m -4.0 -4.4 proposed East – West Railway project and (6) Resurgent newsflow on Iskandar Malaysia 3m -10.0 -9.5 where MMC is the second largest owner of private landbank. 6m -13.9 -15.5 12m 5.3 -8.0 Good Trade in volatile times. With Syed Mokhtar in the limelight and so many possible 6-month Share Price Performance positive catalysts, we believe MMC remains a good Trading Buy call and we maintain our SOP derived fair value at RM3.62.. 3.20

3.00

2.80

2.60

2.40

2.20

2.00 Jan/00 Dec/10 Jan/11 Feb/11 Mar/11

FYE Dec (RMm) FY08 FY09 FY10 FY11f FY12f Revenue 8545.4 8443.9 8864.3 9194.4 9470.5 Net Profit 524.3 236.7 119.5 430.2 523.0 % chg y-o-y 16.4% -54.9% -49.5% 260.0% 21.6% Consensus - - - 484.6 541.2 EPS (sen) 17.2 7.8 3.9 14.1 17.2 DPS (sen) 2.5 3.0 3.5 3.0 3.0 Dividend yield (%) 1.0 1.1 1.3 1.1 1.1 ROE (%) 8.8 3.8 5.3 6.4 7.3 ROA (%) 1.6 0.7 0.9 1.2 1.4 PER (x) 15.2 33.7 66.8 18.5 15.3 BV/share (RM) -0.75 -0.58 -0.45 -0.34 -0.20 P/BV (x) -3.5 -4.5 -5.8 -7.7 -13.2 EV/ EBITDA (x) 8.0 7.6 7.8 6.9 6.4 Notes: Core profits only. Exceptional items including forex indicated in table at the back page

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KEY HIGHLIGHTS

Tan Sri Syed Mokhtar in the news. Tan Sri Dato’ Seri Syed Mokhtar Shah bin Syed Nor (Syed Mokhtar) has been in the news lately with his companies grabbing headlines through corporate developments. Firstly there was Padini Holdings where Syed Mokhtar disposed of his 27.25% stake held via Puncak Bestari SB on 22 April with some of the shares sold at RM1.02. Then DRB-HICOM announced on 25 April that it had won the bid to buy Khazanah’s 32.2% stake in Pos Malaysia for RM3.60 per share with most analysts viewing the deal as being positive for DRB. The latest news had Padiberas Nasional (Bernas) announcing on 26 April that the Federal Government had extended its mandate to manage the country’s rice supplies for another 10 years. The agreement will run from 11 Jan 2011 till 10 Jan 2021. All these 3 companies are indirectly owned by Syed Mokhtar.

Figure 1: Syed Mokhtar related companies. A sample of outperformers YTD

Company Tradewinds (M) DRB‐HICOM Padiberas Nasional Tradewinds Corporation Padini

Market Cap (RMm) 2356.9 3903.5 1368.9 1067.3 736.9 Net Profit (RMm) 482.1 472.3 177.1 130.7 86.28 Price (RM) 8.01 2.27 2.91 0.95 1.12 PER (x) 4.89 8.26 7.73 8.17 8.54 YTD (%) 19.55% 17.01% 7.38% 4.97% 2.75% Business Palm oil, Rice, Sugar, Automotive, Financial, Rice importation, Hotel operation. Apparel Retail Rubber Property, Defense stockpile, milling and Property development wholesaling and investment Major Shareholders (%) Syed Mokhtar (42.97%) Syed Mokhtar (55.92%) Syed Mokhtar (72.57%) Syed Mokhtar (71.48%) Yong Pang Chaun via Kelana Ventures, via Etika Strategi SB via Tradewinds (M) via Kelana Ventures, (43.74%) Seaport Terminal & Seaport Terminal & Restu Jernih Restu Jernih Felda Global Ventures EPF (9.11%) Syed Mokhtar (27.25%) Holdings (20.00%) via Puncak Bestari Khazanah (5.13%) Note: Syed Mokhtar has disposed of his stake in Padini via Puncak Bestari. Reported net profit numbers used which may include exceptional items Source: OSK, Company Data

Figure 2: Syed Mokhtar related companies. A sample of underperformers YTD

Company MMC Corporation Tradewinds Plantation

Market Cap (RMm) 7947.6 1751.5 Net Profit (RMm) 344.9 185.5 Price (RM) 2.62 3.31 PER (x) 23.04 9.44 YTD (%) ‐5.76% ‐2.36% Business Ports, Power Palm Oil, Rubber generation, Gas distribution, Highway operation, Construction Major Shareholders (%) Syed Mokhtar (51.76%) Syed Mokhtar (73.70%) via Seaport Terminal SB via Tradewinds (M), Kelana Ventures, Restu Jernih & Seaport Terminal ASB (16.68%) Southern Integrated Agriculture Project SB (9.8%) EPF (8.98%) Note: Zelan and Aliran Ihsan have not been included as they are owned via MMC. Reported net profit numbers used which may include exceptional items Source: OSK, Company Data

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OSK Research Who’s Next? Looking at the sampling of companies in Figures 1 and 2, a few things are apparent namely that (1) Most of Syed Mokhtar’s companies have put in decent YTD gains outperforming the KLCI and (2) most of them trade at decent PER of below 10x. The exception to this is Tradewinds Plantation which as per the rest of the Plantation sector in 2011 has suffered from volatility in the price of Palm Oil. Also, the most glaring exception is MMC Corporation which is the crown jewel in Syed Mokhtar’s empire. The stock is the largest in terms of market cap and were it not due to exceptional items relating to provisions from its associates, would also have been the largest by profits. The skeptics for MMC would put this underperformance down to:  Its relatively high PER compared to the market and other Syed Mokhtar companies  Its strong performance in 2010  Newsflow in the form of the KL MRT having already been built in

Many possible catalysts for MMC. While the 3 factors above are possibly true, we believe there remains many other potential positive catalysts for MMC that could see the company grabbing the headlines and enjoying a positive rally similar to its other sister companies. These would include:  Malakoff securing the 1000MW extension to its Tanjung Bin power plant. Not built into forecasts yet  Gas Malaysia’s IPO gaining more traction  The MMC/Gamuda JV officially securing the tunneling portion of the KL MRT project  Syed Mokhtar buying Penang Port/Northport/Kuantan Port/Kemaman Port  MMC securing the proposed East – West Railway project  Resurgent newsflow on Iskandar Malaysia where MMC is the second largest owner of private landbank. Note that our SOP fair value takes into account a price of between RM20 to RM25 psf for some 35% of its landbank in south Johor

A good trade. With Syed Mokhtar definitely appearing to be in the good books of the government currently, we do expect that it will only be a matter of time before something comes MMC’s way. As such, we maintain our Trading Buy call on the company with our SOP fair value unchanged at RM3.62.

Figure 3: Sum of Parts fair value for MMC

Business Entity within Group FY11 Applicable Net Present Market Cap % attributable Contribution estimated net se ctor PER Value (RMm)* (RMm) to MMC to RNAV profit (RMm) (RMm) Port of Tanjung Pelepas 4222.1 70.0% 2955.5 Gas Malaysia 2544.7 41.8% 1063.7 Johor Port 995.0 100.0% 995.0 Malakoff 19923.9 51.0% 10161.2 SMART 317.3 50.0% 158.7 Engineering businesses 193.3 12 100.0% 2318.8 Senai Airport (NTA and P/BV) 295.5 2 591.0 100.0% 591.0 Zelan 287.3 39.2% 112.6 Aliran Ihsan 377.7 69.0% 260.6 SATS Land 1036.2 100.0% 1036.2 Tanjung Bin Land 687.8 100.0% 687.8 Tusdeer 1034.1 20.0% 206.8 Jazan Power Plant 1386.9 51.0% 707.3 Jazan Aluminium Smelter -954.0 20.0% -190.8

Total 20547.9

Attributable net cash / (liabilities) (9,527.7)

Net RNAV 11020.2 Number of outstanding shares 3045.1 Net RNAV/share 3.62

Source: OSK,

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OSK Research EARNINGS FORECAST

FYE Dec (RMm) FY08 FY09 FY10 FY11f FY12f

Turnover 8545.4 8443.9 8864.3 9194.4 9470.5 EBITDA 2834.8 3204.5 3105.8 3399.6 3444.7 Depreciation -1013.1 -1168.9 -1192.3 -1204.2 -1228.3 Net Interest Income -1236.5 -1240.0 -1230.9 -1075.4 -1075.4 Exceptional Items 3.0 0.0 225.4 0.0 0.0 Associates 215.3 -109.9 -52.3 8.6 128.6 PBT 803.5 685.8 855.7 1128.6 1269.6 Net Profit 527.3 236.7 344.9 430.2 523.0 EPS (sen) 17.3 7.8 11.3 14.1 17.2 DPS (sen) 2.5 3.0 3.5 3.0 3.0

Margin EBITDA (%) 35.7 38.0 35.0 37.0 36.4 PBT (%) 11.8 11.8 7.1 12.3 13.4 Net Profit (%) 6.1 6.1 1.3 4.7 5.5

ROE (%) 8.8 3.8 5.3 6.4 7.3 ROA (%) 1.6 0.7 0.9 1.2 1.4

Balance Sheet Fixed Assets 27819.5 29958.6 28718.4 27734.1 26839.4 Current Assets 6914.7 7220.7 7300.0 8582.5 9976.2 Total Assets 34734.3 37179.3 36018.5 36316.7 36815.6 Current Liabilities 4228.3 4710.1 5642.6 5601.0 5666.3 Net Current Assets 2686.4 2510.6 1657.4 2981.5 4309.9 LT Liabilities 21145.9 22706.9 19972.6 19972.6 19972.6 Shareholders Funds 6114.1 6301.8 6594.3 6934.1 7367.7 Net Gearing (%) 266.6 265.6 243.6 213.5 182.2

FYE Dec (RMm) FY08 FY09 FY10 FY11f FY12f Turnover 8545.4 8443.9 8864.3 9194.4 9470.5 -Transport & Logistics 1197.3 1203.3 1383.0 1488.7 1558.3 - Energy & Utilities 7248.3 7219.6 7473.3 7702.8 7909.2 - Engineering & Construction 40.2 8.0 0.0 0.0 0.0 - Others 59.6 13.0 3.0 3.0 3.0 EBITDA 3046.8 3204.5 3105.8 3399.6 3444.7 -Transport & Logistics 503.4 510.7 582.8 628.2 644.2 - Energy & Utilities 2315.3 2741.0 2840.4 2890.9 2906.2 - Engineering & Construction 5.8 -8.0 -68.0 -50.0 -50.0 - Others -30.3 -38.9 -87.0 -69.6 -55.7

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OSK Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment decision-making based on this report. The company, its directors, officers, employees and/or connected persons may periodically hold an interest and/or underwriting commitments in the securities mentioned.

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Chris Eng

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