• 9M23 core net profit of US$348m came to 74% of our previous full-year forecast, slightly above expectations since we expect a stronger 4Q23F.

• Reiterate Hold, with a higher SOP-based TP of RM7.64 as we roll forward to end-CY24F, but also incorporate higher assumed debt costs for the Mero-3.

• MISC unexpectedly trimmed its quarterly DPS to 7 sen in 3Q23, back to historical levels, and down from a more generous 10 sen in 2Q23.

3Q23 Sees Sequentially-lower Profits for AET and Offshore Divisions

3Q23 core net profit of US$113m was 9% higher qoq, mainly due to narrower provisions for foreseeable project losses at MMHE compared to the elevated provisions in 2Q23. Stripping out MMHE, MISC’s 3Q23 core PBT would have been 14% lower qoq, as the sequential decline in spot crude tanker freight rates caused a 13% qoq drop in AET’s core PBT, while the 3Q23 offshore core PBT declined 81% qoq as the FPSO Mero-3 construction profit recognition slowed down in step with the higher percentage of completion. We had already flagged the potential for weaker performances of AET and the offshore division in our 31 Oct 2023 report. The LNG division reported stable core PBT in both 2Q23 and 3Q23. On a yoy basis, the 3Q23 core net profit was 36% lower, because the MMHE pretax loss in 3Q23 contrasted to core pretax profits in 3Q22, while AET had received a one-off compensation in 3Q22. Excluding these two items, MISC’s 3Q23 core PBT would have been 16% better yoy, due to stronger underlying AET profits and higher LNG earnings as two new LNG vessels became operational in Feb and Apr 2023 (partially offset by the expiry of one legacy LNG contract in Jan 2023). We highlight that MISC’s reported net profit in 3Q23 was only US$93m, against our estimate of its core net profit at US$113m; the difference of US$20m related to provisions for the repair capex of the FSO Benchamas-2 that had suffered a structural failure in Mar 2023. We classified this provision as an exceptional item because it is recoverable from insurance, according to MISC.

AET to Do Better, But LNG and Offshore Could Moderate in FY24F

We expect MISC to perform better in 4Q23F compared to 3Q23, on account of the surge in crude tanker shipping freight rates in Oct-Nov 2023. Shipbroker Clarksons and shipping consultancy Poten attribute this to 1) longer-haul shipments of crude oil from the Americas to Asia, which have taken market share from the shipments of crude from the Middle East to Asia as a direct consequence of the OPEC+ production cutbacks and Saudi Arabia’s voluntary production cut; 2) pick-up in Chinese demand for crude this year, due to the recovery in jet fuel demand; and 3) low single-digit percentage shipping fleet growth. We expect the strong AET performance to continue into FY24-25F. Conversely, LNG earnings may moderate next year as more legacy charters expire, and offshore earnings could also fall in FY24F as additional construction profits are limited by the already-advanced c.90% percentage of completion of the FPSO Mero-3. Separately, we cut our DPS estimate for FY23F to 36 sen (from 40 sen), and for FY24-25F to 33 sen (from 40 sen). Upside risk: higher-than-expected tanker freight rates. Downside risk: unexpected delays to Mero-3.

Source: CGS-CIMB Research - 22 Nov 2023