Results

In line - Reported 1Q14 core profit of RM486.4m (seasonally stronger quarter), achieving 27.0% of HLIB’s FY14 earnings and 28.7% of consensus.

Deviations

None.

Dividends

None. Management guided for dividend resumption given its strengthened cash flow and lack of capex commitment.

Highlights

Expect impairment charges in 2H14 on 5 Puteri Class LNG fleets, which are due to expire (1 in 3Q14, 2 in 2015, 1 in 2016 and 1 in 2017), despite potential contract extension. MISC is actively tendering for LNG shipping projects outside Malaysia. However, the charter rates could potentially be lower due to oversupply of LNG tanker situation.

Post the seasonal strong rebound in 1Q14, charter rate has trended down in March, which will dampen Petroleum shipping earnings. MISC guided for potential losses for the remaining year after posting US$11m PBT in 1Q14. However, management expects average charter rate to be stronger in 2014-2015 as compared to 2013.

Despite smaller Chemical tanker fleet, this division reported larger losses in 1Q14 due to fleet repositioning for potential disposal. MISC completed the disposal of the remaining 2 Melati class in 1Q14 at carrying value (no gain/loss).

The upcoming FPSO Cendor (replacing FSO Cendor) by 2H14 will be recognized under finance lease, which entails lumpy recognition as it commences operation (likely to be larger than the impairments on 5 Puteri Class LNG).

Parts of the assets owned by VTTI (MISC owned 50% JV), will be listed in US by 2H14, to realize the valuations. The cash proceeds will be distributed back to MISC and Vitol.

MISC is expected to recognize gains of RM50m from the disposal of MILS (integrated logistics) by 3Q14.

Risks

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

Forecasts

Unchanged.

Rating

Hold

Positives –

• Strong cash flow from LNG and Offshore.
• Recovering of charter rate.

Negatives –

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

Valuation

Since our last downgrade in Mar 14, MISC share price had trended down by 8.6%. We upgraded MISC to Hold with unchanged TP of RM6.32 (based on SOP), in view of the share price retracement. However, we do not foresee significant near term catalyst for MISC.

Source: Hong Leong Investment Bank Research - 12 May 2014