- We maintain our HOLD recommendation on MISC with a higher fair value of RM6.90/share (vs. RM6.35/share previously), as we rollover our sum-of-parts valuations to end-2015.

- Our higher fair value stems from our upward revision of market values for petroleum tankers, but is partially offset by lower market value of MMHE based on the current share price. We have also raised our FY14F-FY15F earnings by 6%-7% as we account for larger improvements in petroleum charter rates.

- Stripping off gains of RM13.5mil from the disposal of its chemical vessels, MISC recorded 3QFY14 core net profit of RM457mil (+36% QoQ, +16% YoY), bringing 9MFY14 core net profits to RM1,280mil (+27% YoY). The results were largely in line within our expectation, accounting for 77% of our previous full-year estimates (consensus: 72%).

- Sequentially, 3QFY14 core net profits improved by 36% QoQ, largely due to higher profits from the LNG division from higher earning days and lower drydocking days, and lower losses from the petroleum division due to higher freight rates and increased lightering activities from the Aframax segment.

- On a YoY comparison, 9MFY14 earnings growth of 27% came on the back of:- (i) stronger petroleum shipping rates compared to last year; (ii) higher earning days for the LNG segment; (iii) full-year contribution from Gumusut Kakap semi-FPS; and (iv) narrower losses from the chemical segment following the disposals of some loss-making vessels. This was partially offset by a 49% decrease in MMHE earnings.

- Management expects petroleum tanker charter rates to seasonally improve going into 4QFY14, as demand would pick up during the winter season. We should therefore see the petroleum division’s losses narrow further for the year. Going forward, charter rates are expected to be further supported by demand picking up in Asia.

- LNG rates remain under pressure (time charter and spot rates declined by 31% and 43% YoY in 3QFY14, respectively) due to the huge delivery of new vessels. Although MISC is currently insulated from this due to its long-term charters, note that the Puteri Intan tanker charter with Petronas had expired and will be undergoing refurbishments, while four more charters will expire over the next three years. MISC is currently in negotiations with Petronas on these charters, but we estimate earnings to decline by 2%-4% assuming renewal at the current rates.

- Separately, MISC will recognise a one-off finance lease gain of more than US$200mil in 4QFY14 with the commencement of FPSO Cendor. However, this will be offset by the impairment cost of Puteri Intan LNG tanker.

Source: AmeSecurities