Investment Highlights

• We maintain our HOLD call on MISC with an unchanged sum-ofparts-based fair value of RM7.70/share which implies an FY20F EV/EBITDA of 9x – 1 standard deviation below its 2-year average of 10.4x.

• Following the legal provision for Gumusut Kakap semi-floating production system of US$475mil (RM1.9bil) in 1QFY20, MISC has made further asset impairments of RM306mil for its heavy engineering division, in line with MMHE’s earlier results announcement last month, together with provisions for an LNG vessel and right of use of asset. This stems from the long term impact of low crude oil prices and Covid-19 pandemic that have deferred global upstream projects.

• Pending an analyst briefing later today, our forecasts are maintained, as excluding these provisions and unrealised forex gain of RM20mil, MISC’s 1HFY20 core net profit of RM1,113mil came in within our expectations, accounting for 66% of our FY20F earnings.

• Even though 1H accounted for a lower range of 51%-57% for FY16- 19 core net profit, we expect 2HFY20 charter rates to remain depressed for LNG and tanker rates, as well as slower rollout of offshore projects.

• Simply prorating 2QFY20 core earnings to the rest of the year will imply that the full year results will be 6% above our forecast, which is already 16% below consensus. As such, we view 1HFY20 core results as below street’s estimates.

• The group’s 2QFY20 core net profit fell 57% QoQ to RM339mil, driven mainly by lower petroleum tanker rates which reversed in 2QFY20 after skyrocketing in March-April this year due to landbased storage facilities reaching full utilisation amid an unprecedented drop in Covid-19-depressed consumption globally.

• The LNG division, which accounted for 46% of 1HFY20 operating profit, slid QoQ marginally in 2QFY20. As the heavy engineering revenue halved QoQ from yard suspension caused by movement control order and border restrictions, the division registered a RM100mil loss vs a slight RM6mil operating profit in 1QFY20.

• As we had forewarned in our update on 12 May this year, tanker rates have subsided after ferocious contango trading activities from an unprecedented oil glut led to a shortage in offshore storage in March-April. QoQ, Suezmax rates have fallen by 80%, Aframax by 78% and VLCC by 72% in June.

• Moving further ahead to the present, low crude demand has depressed shipping rates by 89% for the Arabian Gulf to US route since the all-time peak on 16 March 2020. Likewise, the Arabian Gulf to Japan rates have fallen by 86% (See Exhibit 6). However, this will be partly mitigated by the group’s declining spot exposure to 24% of the petroleum/chemical segment from 35% in 2QFY19. The stock currently trades at a fair FY20F EV/EBITDA of 9x, which translates to a premium of 1.6x – 1.51ppt below the average 2-year premium of 2.7ppt to AP Moller Maersk’s 7.4x.

Source: AmInvest Research - 13 Aug 2020