Investment Highlights

• We maintain our HOLD recommendation on MISC with an unchanged fair value of RM6.65/share, which is at a 20% discount to our sum-of-parts valuation of RM8.31/share. This implies an FY18F EV/EBITDA of 8x, below its 2-year average of 10x but in line with AP Moller-Maersk.

• Even though management maintains its FY18F USD core operating cash flow guidance of 10% YoY decline vs. MYRdenominated EBITDA drop of 33% in 9MFY18, we have reduced FY18F-FY20F earnings of 5%-12% on lower charter rate assumptions for the tanker division. Our FY18F net profit has decreased further from 4% to 15% below street’s.

• We note that MISC's 9MFY18 core net profit of RM906mil (excluding unrealized forex and exceptional items) came in below expectations, accounting for 53% of our earlier FY18F earnings and 52% of consensus, vs. 66%-77% in comparable periods over the past 3 years. The group declared a third interim dividend of 7 sen (flat QoQ and YoY), which leads to a 9MFY18 flattish DPS of 21 sen that is within expectations.

• While we expect a stronger 4QFY18 as tanker rates are seasonally improving towards the year-end winter, we note that the overall trajectory remains depressed on excess capacity and weak demand. QoQ, VLCC spot rose 36% in September from increased demand while Aframax increased 23% on tighter vessel availability during the Caribbean hurricane season. However, on a YoY comparison, VLCC rates are down 67% and Suezmax 17% while Aframax was flat.

• Excluding one-off gains from the Gumusut-Kakap adjudication award in 2QFY2017 and acquisition of FSO Mekar Bergading from EA Technique in 3QFY18, MISC’s 9MFY18 core net profit halved YoY due to: 1) absence of compensation for early termination of LNG Tenaga Lima’s charter; 2) lower LNG charter rates and higher vessel drydocking days; 3) lower VLCC and Aframax charter rates; and 4) lower progress recognition and higher FSO conversion costs for the Benchamas 2 project at the heavy engineering division.

• The heavy engineering segment, which registered a 9MFY18 loss of RM94mil vs. RM10mil in 9MFY17, is likely to remain in the red as the main Bokor central processing platform project is only expected to reach its profit-recognizing threshold of 25% towards the end of the year.

• The group’s 3QFY18 operating profit was flat QoQ as petroleum charter rates improved towards the end of 3QFY18 together with recognition of variation orders in the heavy engineering division, mostly offset by higher LNG drydocking days. Nevertheless, MISC’s 3QFY18 core net profit dropped 18% QoQ to RM275mil on lower associate contribution and higher depreciation charges.

• LNG and offshore charter rates are mostly fixed for the long term, while the proportion of MISC’s tanker spot charters have fallen to 41% in 3QFY18 from 44% in 1QFY18. The stock currently trades at a fair FY19F EV/EBITDA of 8x, near AP MollerMaersk’s 9x and supported by attractive dividend yields of 5%.

Source: AmInvest Research - 21 Nov 2018