Results

• Below expectation - Reported 4Q16 and FY16 core profit of RM 599.6m and RM1,899.2m respectively, achieving 93.8% of HLIB’s and 91.6% of consensus.

Deviations

• Weaker than expected LNG earnings post expiry of contract of older vessels.

Dividends

• 20sen/share of tax exempt dividend was declared, bringing whole year dividend to RM30sen/share, above our expectations of 20sen/share.

Highlights

• YoY: Core PATAMI for the group plunged by 20.4% to RM599.6m in 4Q16 due to: (i) lower LNG revenue driven by lower earning days and downward OPEX rate adjustment to FSU; (ii) lower Heavy Engineering revenue due to low work orders; and (iii) lower Petroleum charter rates due to weaker market and coupled with high depreciation cost post change in accounting policy.
• QoQ: Group’s headline core profit surged 84.7% in 4Q16 attributed to; (i) higher Offshore revenue from extra demobilization revenue for some assets; and (ii) stronger Petroleum tanker rates due to seasonality (winter) coupled with better margins on lower charter hire expenses.
• Ytd: Group’s core net profit in FY16 weakened by 31.7% YoY to RM1,899.2m mainly underpinned by: (i) lower LNG charter rates upon renewal for old vessels and lower earning days; (ii) lower overall Petroleum tanker rates during the year; and (iii) lack of major projects in 2016 for Heavy Engineering upon completion of major projects in 2015.
• Outlook:
• LNG: The group is expecting 2 new LNG vessels to be delivered in 2017. However, this would be negated by downward revision of rates for 1 existing LNG vessel upon extension of contract. Vessel oversupply to persist globally with orderbook at 27% of total fleet.
• Tanker: 2017 is expected to be a rather flattish year for Petroleum segment as demand with fleet growth expected to be still high. 2018 is expected to be inflection point for the market as fleet growth slows.
• Offshore & Heavy Engineering: Growth would be anchored by GKL earnings consolidation while MMHE remains a concern due to orderbook shrinkage. Next CAPEX cycle for Offshore assets would be in our opinion beyond 2017 as oil market recovers gradually.

Risks

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

Forecasts

• We cut our earnings forecast for FY17/18 by 19/26% to account for lower Petroleum tanker rates and lower LNG tanker rates for upcoming vessels and the ones due for renewal.

Rating

HOLD (↔)

• While we expect recovery in both Petroleum and Offshore in the longer term, near term earnings appear to be challenging as MISC is expected to struggle in replacing the earnings void left behind by older LNG vessels (with much higher rates). Petroleum market in addition would need another year for market rebalancing.

Valuation

• Our SoP-driven TP is cut to RM7.52 from RM8.15 post earnings revision.

Source: Hong Leong Investment Bank Research - 13 Feb 2017