MMC Corporation - BUY - 23 May 2008

MMC Corporation - 1Q08 net profit below expectations (Results Note)



Price: RM3.62

Target Price: RM4.70

Recommendation: BUY



· 1Q08 net profit of RM157.1m was below expectations being 21% and 22% of our FY08 forecast and consensus of RM753.1m and RM717.5m respectively. This was largely due to lower contribution from engineering and construction which turned in operating loss of RM4.0m. We gather this is largely due to start up cost incurred ahead of commencing work on double tracking rail project.

· YOY, 1Q08 net profit was higher by 70.9% largely on the completion of 100% acquisition of Malakoff which was completed in May 2007. At pretax profit level 1Q08 was 146% higher. The wide divergence in the difference in increase was largely due to significantly lower income tax expense in 1Q07 where income tax rate was only 2.5% as a result of deferred tax adjustments.

· QoQ, 1Q08 net profit was 16.1% lower as administrative expense rose sharply by 232% while higher income tax expense and minority interest resulted in the weaker performance which disappointed as market expected higher construction earnings.

· We are maintaining FY08E and FY09E forecast as earnings could be lumpy QoQ despite the bulk of the profits coming from Transport and Energy divisions. Construction earnings are volatile QoQ.

· Maintain BUY and target price of RM4.70. MMC has significant upside as our target price based on sum of parts RNAV does not include any forecast of the USD30b Jazan City in Saudi Arabia (including the MOU to take a 20% stake in the aluminium smelter in Jazan City. Execution risk remains the greatest downside to earnings disappointment given the enormous task ahead. In addition, several more projects are in the pipeline like the Aeropolis near Senai airport that is expected to be spearhead by a company linked to Tan Sri Syed Mokthar.





KENANGA INVESTMENT BANK BERHAD (15678-H)