■ 1H23 core net profit of US$235m was 45% of our previous full-year forecast, underperforming due to a provision for foreseeable contract losses at MMHE.

■ The only positive surprise was the declaration of a 10 sen DPS for 2Q23, more than the usual 7 sen; we raise our full-year DPS from 33 sen to 40 sen.

■ Reiterate Hold with a lower SOP-based TP of RM7.58, partly due to slight upward revision to MISC’s cost of debt, and partly due to the higher DPS.

2Q23 hit by MMHE’s project loss provisions

2Q23 core net profit of US$104m was 21% lower qoq because of a c.US$59m provision (net of minority interest) for foreseeable contract losses at MMHE’s Kasawari sour gas central processing platform fabrication contract. Excluding this item, MISC’s 2Q23 core net profit would have been US$163m, which was US$32m higher than 1Q23’s US$131m, due mainly to a positive swing from the unusually-heavy overhead costs in 1Q23. The qoq improvement can also be attributable to an improvement in LNG profits, probably due to lower maintenance opex. AET profits remained flattish qoq at relatively robust levels, albeit AET’s 1H23 profits were below levels seen in 2H22. Offshore earnings fell qoq as there was a one-off finance lease profit recognition from the renewal of the FPSO Ruby II contract in 1Q23. On a yoy basis, MISC’s 2Q23 core net profit improved 56% vs. 2Q22, mainly because of provision for FPSO Mero-3 cost overruns in 2Q22, and also because AET’s profits were much better yoy. In summary, AET continued to deliver robust profits in 2Q23, but MMHE’s loss-making legacy projects were a drag on the MISC group.

Flattish 2H23F due to tanker rate drop and slower FPSO progress

Looking forward into 2H23F, we expect MISC to deliver core net profits that are roughly similar to 1H23, because the absence of the MMHE provisions may be offset by lower AET profits. Spot crude tanker freight rates corrected sharply in Jul-Aug 2023, on top of the correction in 2Q23, as we explained in our 10 Aug note, and this should be reflected in AET’s performance in 3Q23F and potentially 4Q23F too, since AET’s reported profits normally lag the spot rate cycle. Meanwhile, the FPSO Mero-3 construction only advanced 4% pts in 2Q23 to 89% at end-Jun 2023, from an advance of 10% pts in 1Q23 (from endDec 2022’s 75% to end-Mar 2023’s 85%); with only 11% pts of construction progress to go between 1 Jul 2023 and 1Q24F (when the FPSO is scheduled to sail away from the shipyard in China), we suspect that construction profits from the FPSO Mero-3 project will tail off and contribute less and less to MISC’s quarterly profits in the next six quarters until the FPSO actually achieves first oil, which we expect in late-2024F. 

Raising FY23-25F DPS forecast from 33 sen to 40 sen

Because of the unexciting outlook, we reiterate Hold on MISC. The only ‘excitement’ is with regards to MISC raising its 2Q23 interim DPS from 7 sen to 10 sen; following this, we raise our full-year DPS assumptions from 33 sen to 40 sen for all forecast years. Upside risk: potential recovery in tanker rates if OPEC+ production cuts are removed in 4Q23F. Downside risks: further challenges and delays in its FPSO Mero-3 project.

Source: CGS-CIMB Research - 25 Aug 2023