Prospects of MMC Corporation Bhd’s (MMC) ports – Johor Ports (JPort) and Tanjung Pelepas (PTP) – are expected to remain positive following a budgeted capex of RM700 million for FY 2016.
Following a visit by MIDF Research’s team to catch up with the management of both JPort and PTP, analyst Tay Yow Ken was informed that the capex will generally focus on reinvigorating aged port equipment.
Both JP and PTP have budgeted capex for berth extension of RM200 million and RM500 million, respectively for FY2016. They will also be replacing older quay cranes and rubber-tired gantry in both ports to increase throughput capacity which are less expensive compared to berth expansions.
MIDF Research noted that JPort’s RM200 million capex will also involve refurbishing older warehouses operated by its logistics arm, JP Logistics, into multi-storey facilities with additional 300,000 to 600,000 sq ft of warehouse space.
Additionally, it will also partly address the issue of space scarcity with recent higher demand within the port vicinity as evident by JPort acquiring an additional 82 acres – 8km away from the immediate Johor Port Free Zone area – dubbed the Inland Port with Free Zone status.
“The expansion trail by JPort will enable it to handle the port facilities and lease its yard space for the construction of the Petronas Rapid Project,” Tay pointed out in a company update on MMC. “Also, it will benefit from increased ‘storage cargo’ volume due to PSA’s scarcity of storage area.”
Meanwhile, PTP will utilize part of its RM500 million budget on expanding its 400-500 meter long Northern Berth with additional capacity of 800,000 twenty-foot equivalent unit (TEU) due for completion in 2018.
Plans are in the pipeline to raise capacity by 3.4 million TEU by 2020 through phase 3A of PTP’s berth expansion programs. A further expansion to 4.05 million TEU by 2024 would be undertaken through phase 3B. Both these expansions are estimated to cost a combined RM5 billion spanning over 10 years involving reclamation, dredging and equipment purchases.
“The expansion program will enable PTP to ramp up capacity by +1.8 million boxes from its current 10.5 million TEU to 12.3 million TEU through improving efficiency,” rationalized Tay.
While the plans may seem ambitious, MIDF Research believes that the incoming capacity can be absorbed by new and existing customers. As it stands, PTP’s FY2015 utilization rate is estimated at a bustling 87%.
Meanwhile, JPort was awarded the port operatorship contract for the PETRONAS’ Refinery and Petrochemical Integrated Development (RAPID) project. It recently secured a four-year contract for the operation of the Material Offloading Facilities (MOLF) Jetty at Teluk Ramunia to receive containerized and break bulk cargo consisting of building materials for the RAPID complex construction.
All-in, MIDF Research has maintained a BUY stance for MMC with a target price of RM3.05. This takes into account that MMC’s ports could be listed as soon as 2H 2016, thus creating the largest listed port entity in terms of capacity at 18 million TEU (vs Westports Holdings Bhd’s capacity of 11 million TEU).
The research house further pointed out that MMC is undervalued as its current market capitalization of RM6.4 billion only priced in its port assets which means investors are effectively getting the power asset, engineering division and Johor land for free.
“Earnings contribution from energy arm is also steady while construction segment is enjoying healthy order book,” justified MIDF Research. “Our target price is based on our standard operating practice valuation, implying FY2016 price-earning-ratio (PER) of 19x and 1.3x price-to-book ratio (PBR).”
As at 4.45pm, MMC was down 3 sen to RM1.99 with 394,300 shares traded.