Highlights/ Comments

• LNG charter rates continued to be in the doldrums, given the oversupply of LNG ship situation. Speculators continued to build up LNG fleets ahead of LNG projects commencement. 2 of MISC’s 27 LNG ships, which are operating on short term charters, are exposed to the negative trends.

• On the other hand, Petroleum charter rates remained high in 2Q15 despite weak seasonality. The rate was supported by weak crude oil prices (recently dropped to US$50/bbl). Furthermore, Middle Eastern countries have been selling their crudes to Asia clients at discounts to their benchmark prices. Notably China has been the largest single buyer. We expect MISC – AET petroleum tankers to leverage on the strong momentum and report profits for the upcoming 2Q15 results (offsetting weaker earnings from LNG tankers).
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• Contract replenishment by MMHE (66.5% owned) remained slow with only RM500m won year-to-date. The fabrication industry remained lackluster given the plunge in oil price has delayed capex spending by major oil companies.

Risks

• Continued oversupply of LNG and chemical ships.
• Lack of new contracts for MMHE and Offshores.
• Slow recovery of global economy.

Forecasts

• At this juncture, we are maintaining our forecasts pending further information from management.

Rating

HOLD

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

Post our previous downgrade, share price has dropped by 12.6%. We take the opportunity to upgrade MISC to HOLD recommendation with unchanged target price of RM8.08 based on SOP, as we expect limited downside risk.

Source: Hong Leong Investment Bank Research - 23 Jul 2015