-  We maintain our HOLD recommendation on MISC with a lower fair value of RM6.35/share (vs. RM6.40/share previously), as we account for lower market values for MMHE and chemical shipping segment (due to reduced number of vessels) in our sum-of-parts valuation. However, this is partially mitigated by cash proceeds from the listing of VTTI tank terminal assets.

-  We subsequently trim earnings by 2%-9% as we account for lower contribution from MMHE due to lower margin and order book assumptions, as well as a lower share of profits from VTTI.

-  Stripping off losses incurred on the disposal of three of its chemical vessels, MISC recorded 2Q core net profit of RM336mil (-30.9% QoQ, +26.9% YoY), bringing 1H core net profits to RM823mil (+51.5% YoY). This is in line with our expectation, accounting for 48% of our previous full year estimates (consensus: 48%).

-  MISC declared an interim dividend of 4 sen/share. We believe a similar payout in 2H is possible, bringing total to 8 sen/share, given its cash pile of RM4.7bil as at FY13 and its relatively stable debt level.

-  MISC’s strong 2H growth came on the back of:- (i) stronger petroleum shipping rates compared to last year; (ii) higher earning days for the LNG segment due to less repairs; (iii) full year contribution from Gumusut Kakap semi-FPS; and (iv) narrower losses from the chemical segment following the disposals. This was partially offset by a 49% decrease in MMHE earnings.

-  Sequentially, earnings declined by 31% QoQ, as petroleum tanker rates had since narrowed from its strong levels in 1QFY14. The segment slipped back into losses in 2QFY14, as expected, after recording the first profitable quarter in four years in the preceding quarter.

-  LNG rates remain under pressure (time charter and spot rates declined by 17% and 30% YoY in 2QFY14, respectively) due to the huge delivery of new vessels. Although MISC is currently insulated from this due to its long-term charters, note that five charters with Petronas will expire over the next three years. The renewal status remains unknown at this juncture, but we estimate earnings to decline by 2%-4% assuming renewal at the current rates.

-  Separately, MISC’s jointly-owned VTTI has successfully listed six of its tank terminals on the New York Stock Exchange through a limited partnership. We estimate that MISC would record a lower share of profit from VTTI of RM45mil p.a. going forward. However, MISC would gain a share of proceeds of circa RM550mil (US$172mil) from the listing.

Source: AmeSecurities