Investment Highlights

• We maintain our HOLD recommendation on MISC with a lower sum-of-parts-based fair value of RM8.30/share (from an earlier RM8.80/share), which implies an FY20F EV/EBITDA of 10x, on par with its 3-year average and 40% premium to AP Moller Maersk.

• We have cut MISC’s FY20F–FY21F earnings as FY19 core net profit of RM1,611mil (excluding unrealized forex and RM183mil net impairments) came in below expectations – 9% below our and 18% below street’s forecasts. This stemmed from a lowerthan-expected 4QFY19 tanker revenue increase of 18% QoQ vis- à-vis a 9% decline YoY.

• However, MISC’s FY19 DPS of 33 sen was higher than our forecast due to its special dividend of 3 sen in addition to its fourth interim of 9 sen, which translates to a payout ratio of 103%.

• Excluding one-off impairments, MISC’s FY19 core net profit rose 22% YoY from:

i) 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;

ii) A reversal in petroleum losses due to the recovery in tanker charter rates and lower vessel operating costs, partly offset by lower number of vessels;

iii) Higher charter rate for floating storage unit Tenaga 1 & 4; and

iv) Heavy engineering losses decreasing by 68% YoY on higher drydocking services on LNG carriers and conversion works. This was partly offset by the absence of construction revenue for the FSO Benchamas 2 in FY18 together with demobilisation costs.

• QoQ, MISC’s 4QFY19 core net profit rose by 14% to RM368mil mainly from the higher tanker charter rates, one-off reimbursement cost on offshore upgrading works and higher conversion jobs for heavy engineering segment.

• YoY, tanker rates in December 2019 have generally rebounded seasonally with VLCC almost tripling while Suezmax increased by 50% and Aframax by 68% in September this year. However, these rates have sharply decreased since the beginning of the year due to the seasonal cycle and the negative impact of the Wuhan conoravirus on China-borne shipping, with Worldscale flat rates for the Arabian Gulf to Japan dropping 70% to WS 40 level currently, while that of the Arabian Gulf to US Gulf Coast (USGC) has fallen by 55% (see Exhibit 6).

• LNG spot prices, while rising by 34% QoQ in December due to seasonally higher winter demand, are still lower by 32% YoY due to the mild weather and high inventories. However, this should not have any immediate impact on MISC’s LNG vessels which are mostly secured on long-term charter arrangements. The stock currently trades at a fair FY20F EV/EBITDA of 9x – 5% below its 3-year average while supported by decent dividend yields of 4%. We will provide further updates following the analyst briefing today.

Source: AmInvest Research - 18 Feb 2020