Investment Highlights

• We maintain our HOLD recommendation on MISC with a lower fair value of RM6.95/share (from an earlier RM7.50/share), which is at a 20% discount to our revised sum-of-parts valuation of RM8.68/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 cut MISC's FY18F-20F earnings by 21%-18% from a 5% decline in tanker charter rate and 10ppts reduction in offshore margin assumptions. This stems from MISC’s 1QFY18 core net profit of RM312mil coming in below expectations, accounting for only 12% of our earlier forecast and 15% of street’s.

• As a comparison, 1QFY17 accounted for 33% of FY17 core net profit. However, the group declared a first interim dividend of 7 sen (flat YoY) which was within expectations.

• MISC’s 1QFY18 core net profit halved QoQ due to the drop in petroleum tanker rates which caused the group’s petroleum segment to suffer a RM39mil loss vs. an operating profit of RM44mil in 4QFY17.

• Outlook for tanker rates remains weak as VLCC spot fell 36% QoQ while Suezmax declined 38% and Aframax 13% amid tepid demand. On a YoY comparison, VLCC, Suezmax and Aframax rates are even lower by 60%, 57% and 47% respectively. Hence, petroleum losses could persist over the next 2 quarters.

• The bottom line was further exacerbated by the absence of a US$40mil reversal of mobile offshore production unit receivable provisions in 4QFY17. Adding to that was the lower offshore construction revenue from the floating storage offloading vessel Benchamas 2 at its tail-end stage which halved the offshore operating profit to RM150mil.

• The impact could have been worse if not for the rebound in the LNG division, which accounted for 61% of group operating profit. For 4QFY17, the LNG operation endured a US$20mil impairment of receivables of deferred collections for 2 Yemenbased vessels.

• The heavy engineering segment is expected to remain in the red next quarter following its 1QFY18 loss of RM26mil (vs. a 4QFY18 operating profit of RM25mil) due to less ongoing fabrication works as the main Bokor central processing platform project has only achieved a completion stage of 10% amid fewer marine repair works.

• LNG spot rates have dropped 33% MoM and 42% QoQ due to diminishing winter demand amid high capacity. However, LNG and offshore charter rates are mostly fixed for the long term, while the proportion of MISC’s tanker spot charters has fallen to 44% in 1QFY18 from 46% in 4QFY17. We estimate that MISC’s FY18F earnings could drop by 8% from a 10% decline in spot tanker rates.

• 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 - 15 May 2018