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Thursday, March 5, 2009

MMC CORPORATION (2194)



SELL
Price: RM1.38
Fair Value: RM1.00


MMC Corporation Bhd (MMC) has agreed in principle to obtain a second valuation for its proposed acquisition of Senai Airport Terminal Services S/B (SATS) and the surrounding 2,719 acres of land in Johor, The Star reported today. The decision came from MMC’s meeting with the Minority Shareholders Watchdog Group.

Recall that MMC had initially proposed to acquire SATS and the piece of land in Senai for RM1.95bil via a the issuance of new MMC shares priced at RM2.80/share from parties related to MMC’s major shareholder, Tan Sri Syed Mokhtar bin al-Bukhary. At that time, the valuer IPC Island Property Consultants Sdn Bhd valued SATS and the land at RM2.2bil. Subsequently, MMC revised the purchase price to RM1.7bil but the transaction would be paid for via cash - funding would be via the disposal of MMC’s assets or investments.

We understand that MMC intends to sell a 20% stake in its 70%-owned Port of Tanjung Pelepas(PTP) to fund the SATS acquisition. Recall that newspapers had reported that the Government had allowed the sale of the MMC’s stake in Port of Tanjung Pelepas (PTP) to foreigners. As the approval was not official, MMC would still need to seek the Government’s consent after anagreement has been made - given that the port is viewed as a strategic national asset.
We understand that interested buyers of the stake in PTP include PTP’s minor shareholders A.P. Moller-Maersk and Evergreen Group. MMC had announced that the Minister of Finance (MoF) has granted his approval-in-principle for 2,067 acres of development land in Senai to be gazetted as free zone (commercial and industrial). MoF’s approval was one of the conditions precedent for the completion of the acquisition of SAT and the surrounding land.

Even with the free zone status, we think that the price tag of RM9.45 psf for the land is still expensive for the enormous size of the relatively undeveloped Senai land, which would require many years to reach maturity. Our earlier checks with property players around the area indicate that the land should only be worth between RM3psf to RM5 psf. Given the looming global recession and collapsing property prices, we believe the land valuations should be at the lower range currently.

We maintain our SELL recommendation with an unchanged fair value of RM1.00/share, based on a FY09’s PE of 5x, which implies a discount of 65% to our SOP valuation of RM3.00/share.
We expect sentiments on the stock to remain weak given concerns over corporate governance risks and the group’s high net gearing of 2.7x against the backdrop of a potential liquidity crunch.



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