Results

Within Expectations - Reported 2Q14 core profit of RM342.5m, taking 1H14 core profit to RM828.9m, broadly in line with HLIB (45.9%) and consensus (48.3%), as we expect stronger earnings in 2H14.

Deviations

None.

Dividends

As guided in 1Q14, MISC resumed dividend payout in 2Q14 with approved 4 sen net interim dividend.

Highlights

MISC is still in talks with Petronas on the contract extension for its 5 Puteri class LNG ships (due to expire starting 3Q14). LNG charter rate continued its downward trend, as new ship supply enters the market without firm contract.

MISC believe Petroleum charter rate has past the inflection point, and moving towards recovery to profits (especially on aframax). 1H14 losses have shrunk to US$20m (form US$86.4 in 1H13) on improved charter rates and lowered bunker cost (2Q14: US$629.6/mt vs. 2Q13: US$670.9/mt).

Chemical tanker charter rate remained bleak. MISC continued its asset rationalization to stem losses. Posted US$14.7m losses from the disposal of 3 B-Class vessels. Expect another 4 vessels to be disposed in 2H14.

Commencement of FPSO Cendor in mid-3Q14 will boost earnings in 2H14. Earnings from the FPSO will be treated under finance lease accounting (lump sum at starting point).

MISC’s 66.5% owned MMHE remained disappointing with low order books of RM1.8bn in 2Q14. It is tendering for RM4bn projects. The low yard utilization of only 50% and MSS expense of RM10m indicates the bleak outlooks.

MISC 50% owned VTTI-BV has successfully listed 6 matured assets (under VTTI Energy Partners LP) in NYSE on 1st August 2014. The 64% economic interest by VTTI-BV will be sold to the listed VTTI Energy Partners overtime. MISC also indicated further asset injections in the future.

Risks

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

Forecasts

Unchanged.

Rating

HOLD

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.
• Low order-book replenishment by MMHE.
• High bunker cost.

Valuation

Maintained hold with unchanged Target Price of RM6.32 based on SOP.

Source:Hong Leong Investment Bank Research - 7 Aug 2014