MISC’s 9M18 results with core profit of RM938m (-38% YoY) is deemed within expectations as we expect stronger 4Q18 led by higher charter rates, lower dry docking activities and stronger USD. While LNG segment is expected to stay resilient on firm long term charters, we expect petroleum segment to improve seasonally in 4Q18 on higher winter demand. We increase FY18/19/20 earnings forecast by 2%/4%/4% on higher petroleum tanker rate assumption. Maintain our HOLD rating with higher SOP-driven TP of RM6.40.

Within expectations. At 70%/65% of our/consensus full-year estimates, 9M18 core net profit of RM938.2m is deemed within expectations as we expect stronger 4Q18 results helped by higher charter rates, lower dry docking activities and stronger USD QoQ. Third interim dividend of 7.0 sen/share (ex-date: 30 Nov, payment date: 18 Dec), as expected, was declared (vs 7 sen in 3Q17), bringing its YTD DPS to 21 sen.

QoQ: 3Q18 core earnings inched by 2% QoQ to RM315.9m due to (i) narrowed losses for petroleum segment on higher charter rates, (ii) stronger offshore division (+6%; commencement of FSO Mekar Bergading) and (iii) improving heavy engineering segment from better project billings. However, it was offset by weaker LNG division (-12%; higher vessel dry docking) and higher finance cost (+11%).

YoY: Core earnings dropped by 33% from RM473.1m in 3Q17, no thanks to lower contribution from LNG segment (-41%; lower earnings days and charter rate upon renewal of LNG Puteri Firuz in October last year), heavy engineering unit and weaker USD against MYR. This was partially cushioned by narrowed losses for petroleum segment led by higher freight rates achieved for Aframax and Suezmax vessels.

YTD: 9M18 core earnings also plunged by 38% from RM1.5bn mainly bogged down by lower contribution from all three segments and coupled with weakening of USD against MYR.

Outlook. LNG spot rates have been on the steady rise on tight tonnage availability and this will benefit 2-3 vessels which are on spot charters while the remaining 26 LNG carriers are on secured long term charters. For petroleum segment, we expect rates to recover in 2019 helped by slower fleet tonnage growth and higher demolition activities but margins are still under pressure with high bunker costs. Current portfolio mix of 59:41 term to spot will allow MISC to benefit the recovery of tanker rates. On the other hand, its heavy engineering division’s tenderbook increased by 39% QoQ to RM6.0bn with higher local bids. Management also highlighted that offshore segment will be the main growth focus via both organic and inorganic strategy in deepwater opportunities and brownfield replacement projects.

Forecast. We increase FY18/19/20 earnings forecast by 2%/4%/4% respectively after imputing higher petroleum tanker rate but is offset by higher operating cost for heavy engineering segment.

Maintain HOLD, TP: RM6.40. Our SOP-driven TP is increased to RM6.40 (from RM6.17) after earnings forecast adjustment, imputing higher 0.85x (from 0.8x) PBV on petroleum segment but is offset by lower value for heavy engineering as a consequence of cutting our TP for MMHE’s to RM0.68/share from RM0.78/share previously. Post 3Q18 results conference call, the management is still maintaining its guidance of 10% YoY decline in its core operating cash flow to USD1.2bn and thus, we are maintaining our FY18 DPS forecast of 30 sen premising on stronger earnings outlook in 4Q18. Maintain HOLD recommendation as near term earnings risk would be cushioned by strong balance sheet (net gearing of 0.22x as of 3Q18) and dividend yield of 4.5%.

Source: Hong Leong Investment Bank Research - 21 Nov 2018