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 1HFY19 core net profit of RM917mil (excluding unrealized forex and RM10mil exceptional items) came in within expectations, accounting for 53%–54% of our and street’s FY19F net profit vs. 51%–60% for the previous first halves of the past 3 years. Also, the group declared a first interim dividend of 7 sen (flat YoY) that is in line with expectations.

• YoY, tanker rates have generally rebounded seasonally with VLCC almost doubling while Suezmax rose 53% and Aframax increased by 33% in June this year.

• However, we have already moved past the peak summer season which could mean that petroleum spot rates may begin to soften in 3QFY19, which leads to a traditionally overall weaker bottom line performance.

• The LNG tanker market already 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.

• Excluding one-off net gains from the sale and leaseback of LNG Portovenere and the disposal of LNG vessel Aman Hakata, MISC’s 1HFY19 core net profit rose 37% YoY due to:

i) higher petroleum charter rates amid lower bunker and depreciation costs;

ii) the delivery of Eagle Brasilia on 4 January this year and Eagle Bintulu on 15 February 2019 together with 2 LNG vessels – Seri Bahaf and Seri Balqis – securing short-term charters this year;

iii) higher charter rate for floating storage units Tenaga 1 & 4; and

iv) lower heavy engineering losses.

• QoQ, MISC’s 2QFY19 core net profit slid by 5% to RM447mil mainly due a decline in Aframax charter rate.

• Heavy engineering losses have narrowed to RM9mil in 2QFY19 from RM46mil in 2QFY18 due to higher LNG dry-docking activities, increased project recognition for the Bokor central processing platform job and approval of change orders for past conversion works.

• The stock currently trades at a fair FY20F EV/EBITDA of 8x – 33% premium to AP Moller-Maersk’s 6x, supported by fair dividend yields of 4%. We will provide further updates following the analyst briefing later this evening.

Source: AmInvest Research - 14 Aug 2019