Results

• Below expectation - Reported 9M16 core profit of RM1,504.2m, achieving 61.4% of HLIB’s FY16 earnings and 63.2% of consensus.

Deviations

• Weaker than expected Petroleum tanker rate due to lower global refinery throughput and weaker refiner appetite for crude post squeeze in refining margin.

Dividends

• No dividends are proposed this quarter.

Highlights

• YoY, core PATAMI plunged by 54.8% to RM329.1m in 3Q16 due to (i) weakness in Petroleum tanker rates as refinery throughput decreases amid huge crude inventory buildup (ii) accelerated depreciation as management assumed shorter asset useful life and (iii) lesser LNG vessel count working in the quarter with LNG Puteri Zamrud coming off charter.

• QoQ, group’s headline profit also fell by 33.2% in 3Q16 due to (i) lower seasonal Petroleum tanker rate (ii) lower working LNG vessels QoQ due to Zamrud coming off charter in the quarter (will resume contract in 2017) and (iii) higher bunker cost.

• Ytd, group’s core net profit in in 9M16 weakened by 25.8% YoY mainly underpinned by (i) lesser number of LNG vessels in operations (early termination of Bintulu and Hakata, suspension of 2 Yemen LNG and Zamrud coming off charter) (ii) lower Petroleum tanker rates driven by high vessel delivery and (iii) higher depreciation charge post accounting policy change.

Outlook:

• Tanker: Anticipate stronger 4Q16 for the Petroleum tanker segment as refiners ramp up towards the winter season in 4Q16. In longer run, enforcement of new water ballast treatment convention by 2H17 could accelerate scrapping of vessels as owners might be unwilling to spend CAPEX for old vessel refurbishment.

• LNG: Expect slight improvement in performance in 4Q16 as Seri Camelia LNG vessel is delivered in the quarter. The group is also expecting another 4 new LNG vessels to be delivered in 2017 and 2018.

• 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.

Forecasts

• We cut our earnings forecasts for FY16/17/18 by 15/11/11% to account for lower Petroleum tanker rates and delayed earnings contribution from upcoming LNG vessels.

Rating

BUY (↔)

• Positive view is maintained premised on (i) bottoming of LNG earnings as no major termination is anticipated with potential additional earnings from new vessels (ii) stronger 2017 Offshore contribution with full year consolidation of GKL earnings and (iii) Potential recovery in Petroleum tanker rates upon new vessel standard enforcement.

Valuation

• Our SoP-driven TP is cut to RM8.92 (previously RM9.50) as we lower Petroleum tanker valuations on lower market values.

Source: Hong Leong Investment Bank Research - 3 Nov 2016