Results

Inline - Reported 2Q13 core profit of RM302.5m, taking 1H13 core profit to RM625.3m, which is 56.7% of our FY13 expectations and 47.3% of consensus.

Deviations

Largely in line due to seasonally weaker 3Q.

Dividends

None.

Highlights

Despite Petronas’ intention to have its own fleet of LNG tankers, we remain positive on MISC’s future LNG earnings. Management indicated that the 5 Puteri Class LNG tanker is still under contract renewal negotiation with Petronas, which involve refurbishment cost of ~US$20m/tanker. Talks of 4 LNG (+ optional 4 LNG) is still under negotiation to support Petronas’ upcoming domestic and Australia LNG projects. MISC may also divert its resources to tender for 3rd parties’ projects.

MISC continued to actively manage its Petroleum and Chemical tanker fleets in order to contain losses as charter rate is only expected to recover by 2015. It has disposed 2 VLCCs and 1 Aframax and re-delivered another Aframax. MISC looks to dispose/re-deliver more Aframax as well as Chemical tankers within 2H13.

Recognized US$4.6m loss on disposal of Petroleum tankers and US$16.4m impairment write back on Chemical vessels as well as US$9.5m additional finance charges due to provision adjustment related to cessation of liner division.

Average bunker cost lowered to US$641.4/mt in 2Q13 and has trended down slightly in 3Q13. Management expects bunker cost to remain stable at this level, which will be beneficial to chemical tanker division (70% on spot contract) and petroleum tanker division (30% on spot contract).

Maiden recognition of Gumusut Kakap (based on Finance Lease treatment) of US$5m starting mid-June. Management only expects further contribution of US$25m in 2H13.

Risks

• Continued oversupply of petroleum and chemical ships, depressing charter rates further.
• Increased in bunker cost.
• Slow recovery of global economy.

Forecasts

Unchanged.

Rating

BUY

Positives –

• Potential synergy from VTTI.
• Stronger earnings post disposal of Liner Division.
• Strong support from Parent Group, Petronas.

Negatives –

• Slow down in global economy growth.
• Continued oversupply of tankers, pressuring freight rates.
• High bunker cost.

Valuation

Maintained Buy with unchanged target price of RM6.50 based on based on 10% holding company discount to SOP.

Source:Hong Leong Investment Bank Research - 19 Aug 2013