Investment Highlights

• We maintain our HOLD recommendation on MISC with a lower fair value of RM7.50/share (from an earlier RM7.75/share), which is at a 20% discount to our revised sum-of-parts valuation of RM9.44/share. This implies an FY18F EV/EBITDA of 8x, below its 2-year average of 10x but in line with AP Moller-Maersk.

• We have lowered MISC's FY18F-19F earnings by 5% on slightly lower spot tanker rate assumptions given the weaker-thanexpected seasonal year-end rebound.

• Nevertheless, MISC’s FY17 core net profit of RM2,612mil (+16% YoY) was within our forecast but above consensus - 19% above street’s RM2,192mil. This excludes RM688mil impairments arising from 5 LNG vessels, 7 chemical tankers and RM17mil liquidation loss from MISC Agencies Japan, which was partly offset by RM44mil disposal gain of 45% equity stake in Centralised Terminals to Dialog Group.

• We introduce FY20F earnings with a 6% growth premised on a 5% increase in tanker spot rates and 2% for average time charters. MISC also declared a fourth interim dividend of 9 sen to bring FY17 DPS to 30 sen - flat YOY and within expectations.

• MISC’s 4QFY17 core net profit slid slightly by 2% QoQ to RM622mil despite a 5% revenue increase to RM2.4bil due to US$20mil impairment of receivables of deferred collections for 2 Yemen-based LNG vessels. This caused the group’s LNG operating profit to fall 67% QoQ to RM132mil in 4QFY17 and 5% to RM1.4bil in FY17.

• The second largest earnings contributor was the offshore segment, which rose 13% QoQ to RM355mil in 4QFY17 on construction recognition for the floating storage and offloading vessel Benchamas 2. Together with 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, this segment’s FY17 operating profit tripled YoY to RM1.1bil.

• The petroleum segment rebounded to a 4QFY17 operating profit of RM44mil from 3QFY17 loss of RM60mil. However, this came from a weaker-than-expected seasonal charter rate rebound due to oversupply of tonnage, OPEC production cuts and inventory draw downs supported by higher oil prices.

• Hence, VLCC spot rates surged 31% QoQ but down 83% YoY. Likewise, Suezmax was up 46% QoQ but still down 56% YoY. Aframax was down 14% QoQ and 64% YoY.

• Nevertheless, LNG and offshore charter rates are mostly fixed for the long term, while the proportion of MISC’s tanker spot charters have fallen to 46% in 4QFY17 from 53% in 3QFY17, which we estimate could still cause FY18F earnings to drop by 8% from a 10% decline in spot prices.

• Hence, we believe the stock currently trades at a fair FY18F EV/EBITDA of 8x, in line with AP Moller-Maersk, and supported by attractive dividend yields of 4%.

Source: AmInvest Research - 13 Feb 2018