MMC Corp - BUY - 5 Aug 2008

MMC Corporation - Buying Senai Airport and Aliran Ihsan (Company Update)



Price: RM2.73

Target Price: RM4.38

Recommendation: BUY



* Proposed to buy Senai Airport for RM1.95b by issuance of 696.4m shares at RM2.80 per share and Aliran Ihsan for RM238.6m via a VGO for all its shares and RCULS for RM0.90 each.

* Both companies are linked to Tan Sri Syed Mohkthar which in turn owns Seaport Terminal (Johore) Sdn Bhd, MMC's single largest shareholder with 51.76% stake. As such, Seaport will abstain from voting.

* Very, very long term value realisation. Senai Airport is made a net loss of RM24.8m in FYJune08 with a NTA of RM295.5m. The company which holds the 50-year (45 years remaining) concession to Senai Airport also owns 2,718.7 acres of freehold land surrounding the airport for future development which was valued at RM2.23b or RM18.80psf. Based on P/NTA, the valuation would be high at 6.6x while against land value it would be 1.14x which is reasonable but development potential would probably be achieve in 5 years at the earliest.

* Aliran Ihsan operates 16 water treatment plant in Johor which produces 70% of water supply. Its 20-year concession agreements will end in 2012 and 2014. The nationalisation of water assets under SPAN may result in Aliran selling its concession assets to the government in return for an operating contract extending beyond original concession period. Acquisition price is reasonable at 0.76x P/BV and FYJune08E PER of 6.8x but may not result in full acquisition.

* Aliran Ihsan fits into MMC's regulated asset expansion overseas. Given MMC objective to expand its power generation business overseas, the expertise of Aliran Ihsan is important part of its growth strategy as most power plants in Middle East is usually combined with a desalination water treatment plant.

* Earnings dilution of 13% and 14% for FY08E and FY09E EPS to 20 sen and 21 sen respectively as an additional 22.8% increase in number of shares issued. RNAV falls to RM4.38 from RM4.70. Maintain BUY. Current depressed price has already factored in impact of windfall tax.