- We initiate coverage on MISC Bhd (MISC) with a HOLD rating and a fair value of RM6.40/share, based on a 15% discount to our sum-of-parts valuation of RM7.53/share.

- MISC’s near-term earnings outlook appears challenging as its core business, i.e. LNG, is facing headwinds from weaker rates due to the oversupply of vessels. Charter rates have contracted from USD150,000/day in 2012 to USD68,000/day in April. Starting from this year, MISC will have one vessel due for renewal (out of a total of 27 vessels), and this expiry profile would continue annually for the next three years. Assuming renewal at the lower rates, we estimate earnings to decline by 2%-4% per year.

- Furthermore, it is uncertain as to why Petronas is procuring its own LNG vessels, instead of embedding them within MISC’s balance sheet. In the medium term, however, the outlook may improve, due to a boom in shale gas etc., although the timing of the turnaround remains uncertain at this juncture.

- Thankfully some of these pressures will be somewhat offset by stronger offshore earnings, anchored by new additions to its portfolio of assets. FY14 would see a full-year contribution from its 50%-owned FPS Gumusut-Kakap, while FPSO Cendor will be coming into operation in 2HFY14. Management guided that MISC is bidding for more contracts.

- Elsewhere, MISC should demonstrate better operating performance for its loss-making divisions, i.e. petroleum and chemical segments, on the back of a 100%-150% recovery of freight rates from a trough level in 2013.

- For MMHE, we expect earnings to regain momentum due to a prolific pipeline of new orders driven by the ramp-up of Petronas’ capex spending. The new projects involve multiple enhanced oil recovery jobs comprising high-capex central processing platforms, more complex unconventional and deeper water fields.

- The last two years have seen MISC delivering a sound streamlining of its business including divestment of lossmaking segments (liner and logistics) and the upcoming listing of VTTI this year. While the loss-making segments may soon turn around, its dominant segment, i.e. LNG, will face a challenging operating environment (although this may be offset by the offshore division).

- We rate the stock as a HOLD until we see a stronger uptrend in the offshore division, which we believe may be turning into a valuation driver for MISC.

Source: AmeSecurities