Results

• Within expectation - Reported 1H16 core profit of RM1,198.8m, achieving 48.9% of HLIB’s FY16 earnings and 45.7% of consensus.

Deviations

• None

Dividends

• Declared 1st interim dividend of 10 sen/share, in line with expectations accounting for 50% of our full year FY16 DPS forecast of 20 sen.

Highlights

• YoY, core PATAMI for the group plunged by 30.1% to RM516.7m in 2Q16 due to (i) accelerated depreciation charges amounted to RM105.2m after the management reduced its group’s assets’ useful life assumption (ii) weaker tanker earnings due to weakness in chemical tanker rates and (iii) weaker MMHE earnings due to lower work orders post major project completion.

• QoQ, group’s headline profit fell by 24.3% on account of weaker tanker earnings due to seasonal weakness in Petroleum tanker rates. This was driven by both the refinery maintenance activities in Northeast Asia and weaker chemical tanker rates despite improvements in Offshore division due to incremental GKL contribution (worth circa US$11.6m in 2Q16).

• Ytd, group’s core net profit in 1H16 declined by 7.6% YoY mainly due to (i) higher depreciation charge caused by more conservative asset useful life assumption and (ii) lower MMHE revenue YoY due to lower contract work done. Petroleum segment improved on YoY basis due to improvement in petroleum tanker rates on better supply demand dynamics.

• Outlook:

• Tanker: Anticipate stronger 2H16 especially for the Petroleum tanker segment as refiners ramp up towards the winter season in 4Q16.

• LNG: Expect slight improvement in performance in 2H this year as Puteri Anggun has come off charter in 3Q16 while 2 new LNG vessels for MISC are expected to come on stream in 3Q and 4Q this year.

• Offshore: Growth would be anchored by GKL earnings consolidation while MMHE remains a concern due to orderbook shrinkage.

Risks

• Oversupply of LNG, petroleum and chemical ships, depressing charter rates.

• Increase in bunker cost.

• Slow recovery of global economy.

• Hike in tax.

Forecasts

• Maintained.

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 maintain our SoP-driven TP at RM9.50 and BUY call on the stock. Positive view is premised on (i) reduced likelihood of LNG contract premature termination and (ii) resilience in its Offshore business with long term contracts.

Source: Hong Leong Investment Bank Research - 5 Aug 2016