Results

• Below expectation - Reported 1Q16 core profit of RM682.2m, achieving 24.5% of HLIB’s FY16 earnings and 23.4% of consensus.

Deviations

• MISC has adopted a more conservative depreciation policy for its assets effective 2016, which has increased the depreciation charges by RM90.3m for the quarter.

Dividends

• None.

Highlights

• LNG: Recorded higher PBT of US$149.3m due to US$100m compensation for early contract termination of Aman Bintulu and Aman Hakata (both 51% subsidiaries), partially offset by US$13m impairment provisions and US$6m accelerated depreciation charges. 2 Yemen LNG vessels contracts had also been deferred for 1 year. Earnings likely to be weak for next 2 quarters before the commencement of 2 new LNGs for Petronas by 4Q16.

• Petroleum & Chemical: Reported strong PBT of US$41.2m (incl. US$7m losses from Chemical) despite additional depreciation of US$15m under new depreciation policy. Benefited from higher average charter rate for Petroleum, as MISC renewed its long term charter at improved profitable rate. The complete acquisition of 50% in 6 Paramount Aframax tankers (for US$56.5m by May 2016) will contribute positively in 2H16 (FY15 US$29m net profit). However, MISC will recognize further US$23m impairments.

• Offshores: Recorded core PBT of US$40.6m, excluding US$57m losses from early termination of 2 MOPUs (written down to zero asset value) and further impairments of US$4.5m for FSO Angsi. Expect stronger earnings in 2H16 post completion of 50% Gumusut Kakap FPS for US$445m by May 2016. Expect US$216m negative goodwill and additional US$57.1m profit (based on FY15 earnings).

• MMHE: Remained weak on diminishing orderbook, currently at RM1.1bn and tenderbook at RM1.8bn. Outlook remained weak on diminishing contracts due to low oil price.

• Others: Recognized write-back of US$60m from litigation cases with Equatorial as Singapore Court had dismissed the final appeal, which was partially offset by US$48m impairments for MHI (container vessels).

Risks

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

Forecasts

• Cut FY16-18 earnings by 10-12% respectively after incorporating for higher depreciation charges.

Rating

BUY

Positives

• 1) Sustaining Petroleum tanker charter rate; and 2) Strong support from Parent Group, Petronas.

Negatives

• 1) Continued oversupply of LNG and chemical tanker; and 2) Low order-book replenishment by MMHE.

Valuation

• We cut our TP to RM9.50 (from RM10.00), on earnings cut and lower assets valuation. We maintain positive outlook on MISC’s new LNGs and sustainable Petroleum segment.

Source: Hong Leong Investment Bank Research - 9 May 2016