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 FY19F EV/EBITDA of 8x, below its 2-year average of 10x but in line with AP Moller-Maersk.

• MISC’s FY19F-FY20F earnings have been slightly adjusted even though its FY18 core net profit of RM1,322mil (excluding unrealized forex and exceptional items) was below expectations, coming in 5%–10% below our and consensus’ estimates, due to a weaker-than-expected earnings rebound in the petroleum segment. However, the group declared a final dividend of 9 sen (flat YoY), which leads to an FY18 flattish DPS of 30 sen that is within expectations.

• In January this year, tanker rates have seasonally improved during the year-end winter with spot rates for VLCC up 3.7x QoQ, Suezmax 3.1x and Aframax 3.2x. Charter rates are much better YoY (3-4x) due to the unexpectedly weak recovery in 4Q2017, indicating that some demand recovery may be emerging from the lingering excess global capacity.

• While recognizing that the currently improved charter rates are seasonal, we still expect the recovery in charter rates, which have more than doubled YoY for the petroleum segment on higher scrapping activities and lower capacity additions, to translate to stronger earnings in the upcoming quarters. We introduce FY21F earnings with a growth of 5% premised on a 2% increase in petroleum tanker rates.

• 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 FY18 core net profit halved YoY due to: 1) absence of compensation for early termination of LNG Tenaga Lima’s charter; 2) reduced LNG vessels under charter but partly mitigated by short-term charters for Seri Balhaf and Seri Balqis; 3) higher bunker costs for the petroleum segment; and 4) lower progress recognition and higher FSO conversion costs for the Benchamas 2 project in the heavy engineering division.

• The heavy engineering segment, which registered a FY18 loss of RM30mil vs. RM23mil in FY17, is likely to remain in the red this year at the underutilized yard with the main project being the Bokor central processing platform project.

• MISC’s 4QFY18 core net profit rose by only 8% QoQ to RM381mil on higher petroleum charter rates and associate contribution despite the much stronger charter recovery. LNG and offshore charter rates are mostly fixed for the long term, while the proportion of MISC’s tanker spot charters have fallen to 40% in 4QFY18 from 44% in 1QFY18.

• The stock currently trades at a fair FY19F EV/EBITDA of 8x, near AP Moller-Maersk’s 9x and supported by attractive dividend yields of 5%. We do not expect significant changes to MISC’s earnings or fair value after the analyst briefing later today.

Source: AmInvest Research - 22 Feb 2019