Monday 9 July 2012

MMC Corporation - Considering Aliran Ihsan privatisation


News
MMC had requested a trading suspension on Bursa Malaysia starting from today pending a material announcement.

In a separate announcement, MMC said it had notified its 62.82% owned subsidiary, Aliran Ihsan Resources Bhd (“AIRB”) that it is considering the privatisation of the company.


Comments
We are pleasantly surprised by this news as we do not expect any privatisation within the group at this juncture. The privatisation will allow MMC to ride on AIRB’s steady earnings and cash flow from its water business.

To recap, AIRB is a water-treatment operator which operates mainly in Johor. It is currently operating about 16 water treatment plants (WTP) across Johor, making up about 70% of Johor’s water supply. In August 2011, AIRB was awarded the 3-year O&M contract of the Gunung Semanggol water treatment plant from Lembaga Air Perak. The project will contribute about RM11m revenue per annum to AIRB.

Based on AIRB’s last closing share price of RM1.75, MMC will have to fork up about RM172.2m, which also implies a 1.3x PBV, to acquire the remaining 38% shares in AIRB. As at 3Q12 results, MMC is in a net gearing position of RM14.5b and its cash balances stood at RM7.5b. We do not discount the possibility of non-cash acquisition (i.e. share swap) as most of MMC’s cash is ring-fenced to its debts.


Outlook
AIRB’s additional earnings contribution to MMC will be about 3% (from the current 7%) at the pre-tax level. Going forward, we reckon that AIRB will provide a stable earnings and also cash flow to MMC from its ongoing water business.

Meanwhile, on another matter, we expect MMC to announce in the near term the findings of its feasibility study on its plan to acquire KTMB. Based on recent news flows, MMC is unlikely to absorb KTMB’s hefty debt could be seeking a privatisation/concession of KTMB.


Forecast               No changes to our forecast.

Rating   Maintain OUTPERFORM

We are maintaining our OUTPERFORM recommendation on MMC due to the share price ample upside to our target price and its interesting corporate developments in the near term.

Valuation            No change in our Target Price of RM3.11, which is based on SOP valuation.

Risks      Delays in MRT construction works.

Source: Kenanga



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