Investment Highlights

• We maintain our HOLD recommendation on MISC with an unchanged fair value of RM6.65/share, which is at a 20% discount to our revised sum-of-parts valuation of RM8.31/share. This implies an FY18F EV/EBITDA of 8.5x, below its 2-year average of 10x but in line with AP Moller-Maersk.

• Our forecasts are unchanged as management maintains its earlier FY18F core operating cash flow guidance of a 10% YoY decrease, which could translate to a core net profit contraction of over 20% YoY. The group declared a second interim dividend of 7 sen (flat QoQ and YoY), which leads to a 1HFY18 DPS of 14 sen (flat YoY), which was within expectations.

• We note that MISC's 1HFY18 core net profit of RM670mil (excluding unrealized forex and impairments on receivables) appears be below expectations, accounting for 40% of our FY18F earnings and 38% of consensus. As a comparison, 1HFY15-1HFY17 accounted for 43%-60% of their respective years.

• However, we expect a stronger 2HFY18 as the tanker rate outlook is seasonally improving towards the year-end winter amid easing OPEC production quotas. QoQ, VLCC spot rose 30% in June while Suezmax increased 34% and Aframax 25% on higher demand from the Middle Eastern and Caribbean regions. On a YoY comparison, Suezmax and Aframax rates are up 39% and 18% respectively while VLCC is lower 49% due to excess capacity. We estimate that MISC’s FY18F earnings could rise by 8% from a 10% increase in spot tanker rates.

• MISC’s 1HFY18 core net profit halved YoY due to: 1) absence of compensation for early termination of LNG Tenaga Lima’s charter; 2) higher tanker bunker costs and depreciation; 3) 12% appreciation of the ringgit; 4) absence of reimbursement of Mobile Offshore Production Unit demobilization; and 5) lower progress recognition and higher FSO conversion costs at the heavy engineering division (See our MMHE update on 2 August).

• The heavy engineering segment, which registered a 1HFY18 loss of RM46mil vs. RM26mil in 1HFY17 is expected to remain in the red as the main Bokor central processing platform project is only expected to reach its profit-recognizing threshold of 25% towards the end of the year amid fewer marine repair works.

• The group’s 2QFY18 operating profit decreased 10% QoQ mainly due to the tanker division’s higher bunker costs. Nevertheless, MISC’s 2QFY18 core net profit rose 5% QoQ in tandem with a revenue increase of 6% largely driven by higher project progress at the heavy engineering segment while associate contribution surged 5.6x from a one-off Kikeh lease adjustment.

• LNG spot has risen 53% MoM and 42% QoQ due to tighter tonnage availability and rising demand for the upcoming winter season. However, LNG and offshore charter rates are mostly fixed for the long term, while the proportion of MISC’s tanker spot charters have fallen to 41% in 2QFY18 from 44% in 1QFY18.

• The stock currently trades at a fair FY18F EV/EBITDA of 8x, near AP Moller-Maersk’s 9x and supported by attractive dividend yields of 5%.

Source: AmInvest Research - 8 Aug 2018