- We maintain our HOLD rating on MISC with a higher fair value of RM7.90/share (vs. RM6.90/share previously), based on our sum-of-parts valuation, as we raise our earnings forecasts by 9%-13% for FY15F-FY16F and market value for the petroleum tankers.

- Stripping off the one-off items which include the upfront finance lease gain from the commencement of FPSO Cendor and net impairment provisions from the expiry of an LNG vessel, MISC’s FY14 core net profit of RM1.9bil exceeded our forecast by 7%, but came in within consensus expectations.

- The group registered a decent core net profit growth of 22% YoY for FY14, mainly due to a strong recovery in freight rates for its petroleum segment in 4QFY14, higher earning days in the LNG segment and the commencement of finance lease of FPSO Cendor. The chemical segment also registered lower losses by 27% post its fleet optimisation programme and lower bunker fuel costs. However this was partially offset by lower profit from its heavy engineering segment due to a slowdown in orderbook replenishment.

- The management expects the petroleum shipping rates to remain strong in the coming quarters as there are no signs of a cutback in oil production output by the OPEC. Furthermore, the oil storage market has seen an increase in activities as traders take advantage of the current low crude oil prices, lending further support to spot rates.

- LNG rates remain under pressure (time charter and spot rates declined by 28% and 26% YoY in 4QFY14, 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, while four more charters will expire over the next three years. MISC is currently in negotiations with Petronas on these charters on a collective basis, which is expected to conclude soon. But we estimate earnings to decline by 2%-4% assuming renewal at the current rates.

- We expect the outlook for its heavy engineering division to remain muted, as orderbook replenishment will remain challenging due to capex cuts by the oil majors and intense competition from the international fabrication yards.

- The stock currently trades at an FY15F PE of 17x.

Source: AmeSecurities