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 are maintained as 1QFY19 core net profit of RM469mil (excluding unrealized forex and RM41mil exceptional items) came in within expectations, accounting for 28% of our and street’s FY19F net profit.

• As a comparison, the group’s 1Q accounted for 24%–33% of earnings over the past 3 years. Also, the group declared a first interim dividend of 7 sen (flat YoY) that is in line with expectations.

• Since the beginning of this year, tanker rates have seasonally declined in April with spot rates for VLCC down 75%, Suezmax 67% and Aframax 74%, further dampened by the continuation of lower Opec production quota, over capacity and weak Atlantic demand.

• However, on a YoY comparison, April charter rates still look better with VLCC up 2.6x and Aframax 69%. Moving into the peak summer season, petroleum spot rates have begun to rise this month which could translate to stronger earnings in the upcoming quarters.

• The LNG tanker market appears to be softening with spot rates dropping 70% QoQ due to high stock inventory, vessel overcapacity and low seasonal demand. However, this should not have any immediate impact on MISC’s LNG vessels which are secured on long-term charter arrangements.

• LNG and offshore charter rates are mostly fixed for the long term, while the proportion of MISC’s tanker spot charters have slid to 38% in 4QFY18 from 40% in 4QFY18.

• Excluding one-off net gains from the sale and leaseback of LNG Portovenere and disposal of LNG vessel Aman Hakata, MISC’s FY18 core net profit rose 48% YoY from higher petroleum charter rates, which caused the segment to rebound to a RM135mil operating profit from a RM39mil loss, supported by 2 additional LNG vessels – Seri Bahaf and Seri Balqis – securing short-term charters.

• The heavy engineering segment, which registered a 1QFY19 loss of RM29mil and FY18 loss of RM30mil, 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 1QFY19 core net profit climbed by 14% QoQ mainly due to the 2 LNG vessels’ short-term charters and lower petroleum vessel operating costs.

• The stock currently trades at a fair FY20F EV/EBITDA of 8x – 30% premium to AP Moller-Maersk’s 6x, supported by fair dividend yields of 4%.

Source: AmInvest Research - 27 May 2019