Investment Highlights

• We maintain BUY on MISC with an unchanged sum-of-parts-based fair value of RM7.75/share, which reflects a premium of 3% from our 4-star ESG rating. This also implies an FY21F EV/EBITDA of 8x, 1 standard deviation (SD) below to its 3-year average of 9x.

• While awaiting an analyst briefing later today, we maintain our forecasts as MISC’s 1HFY21 core net profit of RM1,015mil, excluding net impairments of RM65mil and unrealised forex gain of RM19mil, was within expectations, accounting for 55% of our FY21F net profit and 54% of consensus.

• As a comparison, 1H accounted for a higher range of 51%–65% of FY18–FY20 core net profit. The group declared a second interim dividend of 7 sen (flat YoY), which translates to a flat 1HFY21 DPS of 14 sen that is also within our expectation.

• The group’s 2QFY21 core net profit rose by 34% QoQ to RM581mil mainly from a one-off compensation for a renegotiated petroleum tanker charter. This caused the petroleum division’s operating profit to surge 6.2x QoQ to RM212mil despite the sharp drop in spot tanker rates during the quarter.

• As noted in our update on 5 August, 2QFY21 spot rates declined 23% for very large crude carriers (VLCC), 47% for Suezmax and 32% for Aframax. Recall that spot charters for VLCC fell into negative levels for the first time in June this year to -US$122 due to overcapacity as world oil exports remained flat and below preCovid 19 levels despite the Opec+ alliance agreeing to raise production from May 2021 to July 2021. Likewise, June spot charter rates for Suezmax dived 79% QoQ to US$2,505 and Aframax dropped 68% QoQ to US$6,222.

• The liquefied natural gas (LNG) segment, which accounted for 43% of 2QFY21 operating profit, registered a slight 2% QoQ dip to RM294mil from higher operating costs with the delivery of a very large ethane carrier in April this year and LNG carrier Diamond Gas Crystal in May 2021. The offshore segment’s 1QFY21 operating profit dropped 22% QoQ to RM187mil due to higher repair & maintenance costs.

• The worst performing division was the heavy engineering segment despite cutting its 2QFY21 loss by 74% QoQ to RM26mil given the absence of additional cost provisions for a delayed project completion in the previous quarter. Nevertheless, this segment continues to be impacted by lower marine repair business as customers shift to Singapore which has lower Covid19 cases and less stringent border restrictions.

• Going forward, we expect gradual improvement to petroleum tanker rates as Opec+ has decided to raise production levels by 2mil barrels from August to December 2021. Together with the upcoming delivery of an additional LNG carrier and dynamic positioning shuttle tanker in 2HFY21, these underpin our FY22F earnings growth expectations. MISC currently trades at a fair FY21F EV/EBITDA of 7.3x – 2 SDs below its 3-year average of 9x

Source: AmInvest Research - 13 Aug 2021