Investment Highlights

• We maintain our HOLD recommendation on MISC but with a higher fair value of RM7.75/share (from an earlier RM7.35/share), which is at a 20% discount to our revised sumof-parts valuation of RM9.69/share. This implies an FY18F EV/EBITDA of 7.5x, below its 2-year average of 10x but in line with AP Moller-Maersk.

• Our MISC's FY17F-19F earnings have been raised by 15%-17% on higher LNG margin assumptions as the group’s 9MFY17 core net profit of RM2,020mil (+24% YoY) was above expectations, accounting for 92% of our earlier FY17F earnings and 94% of consensus. This excludes RM134mil impairment for LNG vessel Tenaga Lima, RM17mil liquidation loss from MISC Agencies Japan and RM44mil disposal gain of 45% equity stake in Centralised Terminals to Dialog Group.

• As a comparison, 9MFY14-9MFY16 accounted for 66%-72% of FY14-FY16 core net profit. MISC declared a third interim dividend of 7 sen to double 9MFY17 dividend YoY to 21 sen, translating to a payout of 49%, which is within expectations.

• MISC’s 3QFY17 core net profit declined 10% QoQ to RM637mil on a flat revenue of RM2.3bil due to the absence of compensation for early termination of LNG Tenaga Lima’s charter, which registered in 2QFY17.

• LNG operating profit declined 28% QoQ to RM403mil with the absence of early termination compensation for Tenaga Lima. However, the 9MFY17 LNG operating profit was still slightly higher by 4% YoY to RM1,290mil (62% of group), supported by the early charter termination and 3 additional Seri C class vessels.

• The second largest earnings contributor was the offshore segment, which almost doubled QoQ to RM313mil in 3QFY17 on one-off US$4mil recognition of Gumusut-Kakap floating production system’s second adjudication outcome on variation works, US$14mil reversal of doubtful debt provision and US$7mil construction recognition for the floating storage and offloading vessel Benchamas 2.

• For the petroleum segment, which tripled its 3QFY17 loss QoQ to RM60mil, VLCC spot rates halved QoQ to US$7K/day in September this year due to overcapacity amid sluggish demand from the continuation of OPEC quota cuts initiated back in January this year.

• Smaller tanker rates have improved with Suezmax rising 15% QoQ to US$11K/day while Aframax rose 27% QoQ to US$12K/day as Hurricanes Harvey and Irma shut down ports and tanker routes in the Caribbean. Hence, the overall tanker rate trajectory, which is also influenced by the year-end winter season, remains subdued on high global crude inventories.

• LNG and offshore charter rates are mostly fixed for the long term, while the proportion of MISC’s tanker spot charters have risen from 47% in 1QFY17 to 53% currently, which we estimate could cause FY17F earnings to drop by 9% from a 10% decline in spot prices. Hence, we believe the stock currently trades at a fair FY17F EV/EBITDA of 8x, in line with AP Moller-Maersk.

Source: AmInvest Research - 6 Nov 2017