MISC Berhad - Robust 1QFY20 Core Earnings

Date: 12/05/2020

Source  :  KENANGA
Stock  :  MISC       Price Target  :  8.85      |      Price Call  :  BUY
        Last Price  :  6.61      |      Upside/Downside  :  +2.24 (33.89%)

While MISC reported 1QFY20 losses due to one-off expenses, as expected, core earnings actually excelled, benefitting from strong petroleum tanker charter rates amidst global shortage of oil storage space. As such, MISC presents itself as a rare beneficiary of the current low oil price environment. Hence, we reinstate MISC as OP with higher TP of RM8.85, backed by defensiveness from consistent dividends and stable balance sheet.

Reported losses expected, but core earnings surprised. As expected, MISC reported 1QFY20 losses of nearly RM1.2b, dragged by write-offs, re-measurements and provisions expenses totalling to almost RM2b, as a result of its litigation with Sabah Shell Petroleum Company over the construction and lease contract for Gumusut-Kakap SemiFloating Production System (refer to our report dated 27 April 2020). However, stripping off these one-off expenses, the results were actually positive at the core level as 1QFY20 core earnings exceeded expectations, coming in at 51% of our full-year forecasts, and 50% of consensus. This was mainly due to superb petroleum tanker rates as the global shortage of oil storage space had led to a surge in tanker demand. Meanwhile, the company had also announced a 7.0 sen per share dividend, which was well expected.

Strong core earnings helped by surge in tanker rates. 1QFY20 core net profit came in impressively, up by 76% YoY and more than doubled QoQ, driven by strong performance from its petroleum segment which accounted for most of the growth. As aforementioned, the segment benefitted from the surge in charter rates from March 2020 onwards as global shortage of oil storage sparked demand for petroleum tankers. Nonetheless, other segments also performed well: (i) LNG shipping enjoyed higher earning days following lower dry-docking activities, (ii) offshore segment recognised a reimbursement of engineering costs, and (iii) heavy engineering saw greater project completion and increase in conversion works.

Rare beneficiary in current environment. From this recent 1QFY20 results, we see MISC as a rare beneficiary of the current low oil price environment among the sector. With the current oil landscape plagued by oversupply and demand disruption, MISC seems set up to enjoy a strong 1HFY20, benefitting from the recent spike in tanker charter rates. Currently, its portfolio mix of petroleum tankers in spot charters is 29%. Additionally, MISC is also reportedly in exclusive talks with Petrobras for the Mero-3 FPSO, having potentially won against close competitor SBM Offshore. While Petrobras did indeed recently announced a 29% cut in capex budget, we understand the Mero-3 FPSO project is already at an advanced stage, and hence, would be inclined to go forth as planned. Should this be successful, this would be the largest FPSO project undertaken by MISC, as well as its maiden project in Brazil. Meanwhile, while the litigation case against Sabah Shell Petroleum Company dragged the quarter’s reported numbers into losses, we are not too overly concerned given the minimal impact on the company’s balance sheet, and hence, would not impact the company’s ability in maintaining its consistent dividend pay-outs.

Reinstate OUTPERFORM (from MARKET PERFORM previously) with higher TP of RM8.85 (from RM7.90 previously), pegged to 1.1x PBV – which is at +2SD from its mean. Post-results, we raised FY20E/FY21E earnings by 32%/6% to account for higher petroleum segment contribution. We like MISC for these reasons; (i) being a beneficiary of the current scarce oil storage environment, (ii) materialisation of Mero-3 FPSO contract to act as catalyst, while (iii) stable dividends (~4% yield) backed by healthy balance sheet give a degree of defensiveness among the big-cap space. We feel that any dips from this level could provide an entry opportunity.

Risks to our call include: (i) weaker-than-forecasted charter rates, (ii) stronger-than-expected MYR/USD exchange rates, (iii) lower-thanexpected number of operating vessels.

Source: Kenanga Research - 12 May 2020

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