Results

Better than expectation - Reported 3Q13 core profit of RM385.8m, taking 9M13 core profit to RM1.0bn, which is 92.7% of our FY13 expectations and 79.1% of consensus.

Deviations

Appreciation of US$ against MYR, higher JV contributions and lower than expected effective tax rate.

Dividends

None.

Highlights

With Petronas confirming orders for 8 LNG tankers, MISC will only provide operational and maintenance services to Petronas. The upcoming expiry (Jul 14) of a Puteri class is current under negotiation with Petronas for contract extension. Earnings likely to be stable until 2014.

Petroleum tanker charter rate is expected to improve further in 4Q13 and remained steady in 2014. MISC will continue to actively manage its fleet. The lower bunker cost (from US$641.4/mt in 2Q13 to US$623.5/mt in 3Q13) has provided some relief to the division.

Chemical tanker charter rate is expected to improve after slides in 3Q13 due to long holiday in China and Eid Mubarak in Middle East, as well as typhoon disaster. The charter rate is expected to improve yoy, which will enhance profitability.

Higher offshore earnings due to full recognition of FPS Gumusut at US$16.9m. FY14 earnings to improve further from the commencement of FPSO Cendor. Due to financial treatment of financial lease, there will be large incremental revenue in 2014 (operating lease would be US$16m p.a.).

MISC’s 66.5% owned MMHE is struggling to replenish its orderbooks, as it completes the projects in hand.

MISC has obtained approval from MOF for 2 years deferment on implementation of amended Section 54A of the Income Tax Act, 1967.

Risks

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

Forecasts

We have increased our forecast by 25-30% after taking into account of the appreciation of US$, improved margins and lower effective tax rate.

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 lower target price of RM6.05 (from RM6.50), after stripping off earnings contribution from the 8 LNG ships (originally expected to commence in FY15) and accounted for weakened MYR.

Source: Hong Leong Investment Bank Research - 8 Nov 2013