KUALA LUMPUR: Despite improved prospects, MMC Corporation Bhd is still being seen as fairly valued at its current levels by analysts, but most are looking at more upside on the stock following a company briefing held on Monday.

 

The key notes from the briefing include a possible expansion on the books for its unit and independent power producer Malakoff, a tariff hike for Johor Port and more details on its Senai land.

 

MMC’s share price reacted to the analysts’ reports, reaching an intra-day high of RM2.46 in the morning before plateauing for the rest of the day. The stock dropped as trading drew to a close but managed to rise to close at RM2.44, up three sen or 1.4% from the previous day’s close.

 

Of all the developments, it is Malakoff’s expansion plans and Johor Port’s tariff hike that drew the most interest. MMC’s plans include a 2x700MW extension to Malakoff’s existing 2,100MW coal-fired Tanjung Bin plant.

 

“MMC thinks that there is a risk that the electricity from the Bakun hydropower dam in Sarawak would not be exported to Peninsular Malaysia. Given the current gas shortage in the peninsula, the company’s view was that the best way for Malaysia to move forward is to build more coal-fired plants.

 

“We understand that this is part of the plan to create more value for Malakoff as there are plans to relist the company come 2014,” said OSK Research.

 

“It still remains to be seen how much of a tariff hike Johor Port would actually implement as the approval is actually for raising the ceiling tariff rate,” said OSK.

 

MMC also told analysts that its joint venture in the double-tracking rail project had been granted an 11-month extension, which would lower the risk of a late penalty, and was aiming for 68% level of completion by year-end.

 

“We have imputed a normalised 8% profit margin for this division and do not expect the reversal of earnings to happen any time soon,” said Affin Investment Bank in its March 2 report.

 

However, debt is still a sticking point for MMC, which Affin estimated at RM3 billion versus shareholders funding of RM4 billion, which translates to a gearing of 0.7 times.

 

“Central to fund-raising activities, is a potential sale or flotation of the group’s assets — including, but not limited to a potential part sale of Senai airport, the Port of Tanjung Pelepas, and even the flotation of Gas Malaysia and Malakoff,” said Affin.

 

Affin also feels that loss-making Kapar power plant was a possible disposal option for the company. MMC also gave more details on the Senai land disposal, stating that the five-acre land was leased to MOX-Linde at RM20 per sq ft and is currently in talks with a property developer to dispose of a further 100 acres.

 

Affin is keeping its reduce call on the stock despite the more upbeat outlook, stating that it did not expect to see the stock gain traction anytime soon given its low single digit ROE (return on equity) and low yields. 

 

OSK is also maintaining its trading buy call on the stock with a target price of RM2.80. Part of OSK’s reservations on MMC are related to the company taking possible stakes in GIIG Holdings Sdn Bhd’s aluminium smelter in Sarawak or a stake in Jimah.

 

“MMC denied there are plans to take a stage in GIIG and later revealed that any investment would generally have to deliver a return on investment of 15% to be considered,” said OSK.

 

However, under a blue sky scenario, according to OSK, the research house’s sum-of-parts fair value for MMC would go up to RM3.26. This would include blue sky assumptions such as a 5% tariff hike for Johor Port, an expansion for Tanjung Bin and a RM8 billion five-year construction project for MMC, among others.