Results

• Reported 1Q15 core profit of RM495.7m, achieving 22.8% of HLIB’s FY15 earnings and 22.5% of consensus. We deem the result relatively weak, given 1Q is traditionally stronger quarter of the year.

Deviations

• Weaker than expected contribution from LNG (due to drydocking of Puteri Class) and Offshore segments.

Dividends

• None.

Highlights

• LNG: Lower earnings day due to expiry of 2 Puteri Class contracts (sent for refurbishments). Earnings are expected to maintain weak within the next 1-2 years, given the continuous refurbishments (up to 100 days) for the expiring Puteri class LNG tankers and lower renewed charter rates (competitive market), before earnings rebound with the new LNG deliveries (from Petronas) by 2H16.

• Petroleum: Benefit from the strong charter rates, which has seen earnings jumped to US$18.3m (highest since 1Q10). Management guided rates to seasonally weaken in 2Q-3Q, before uptick in 4Q. Unfortunately, most of AET fleets are locked in time charter, before renewal in 2016-2017, which may miss the current strong charter rate cycle.

• Chemical: Charter rates remained weak, due to slowdown in global economic activities (especially China). Nevertheless, MISC has reduced its fleet size to cut losses.

• Offshores: Post maiden contribution from FPSO Cendor in 4Q14, earnings are expected to remain consistent due to their long term contract nature.

• MMHE: Remained weak on diminishing orderbooks, currently at RM1.2bn and tenderbook at RM3bn. Industrial outlook remained bleak due to the plunge in oil price (delayed projects) and margins squeeze (stiff competitions).

• Terminal: Recognised one-off tax adjustment of US$11.9m after official audits on VTTI accounts. Excluding the adjustment, the segment report US$6.7m profits.

Risks

• Oversupply of LNG, petroleum and chemical ships, depressing charter rates.
• Increased in bunker cost.
• Slow recovery of global economy.

Forecasts

• Cut FY15 and FY16 earnings by 9.5% and 7.5% respectively and increased FY17 earnings by 0.9%.

Rating

SELL

Positives

• Strong rebound in Petroleum tanker charter rate.
• Strong support from Parent Group, Petronas.

Negatives

• Continued oversupply of LNG and chemical tanker.
• Low order-book replenishment by MMHE.

Valuation

• After incorporating the new LNG fleet and existing LNG Puteri class LNG charters, we increased MISC target price to RM8.08 (from RM7.40) based on 10% discount to SOP. However, we downgrade MISC to Sell as we believe that market has overpriced the rebound in Petroleum charter rate and LNG contracts.

Source: Hong Leong Investment Bank Research - 5 May 2015