MISC’s 1Q19 results with core profit of RM469m (+12% QoQ; +51% YoY) surpassed expectations on the back of stronger contribution from petroleum contribution. First interim dividend of 7.0 sen/share (ex-date: 10 Jun, payment date: 25 Jun), as expected, was declared (vs 7 sen in 1Q18). We are expecting both LNG and petroleum spot rates to demonstrate QoQ weakness due to seasonality but register YoY growth on improved market conditions. However, upside could be capped by higher new build deliveries and moderating scrapping activities. Increased our FY19 earnings by 6% after imputing lower vessel operating costs and maintain our HOLD rating on the stock with higher SOP-driven TP of RM6.70.

Above expectations. At 29%/28% of our/consensus full-year estimates, 1Q19 core net profit of RM469.3m surpassed expectations helped by higher-than-expected contribution from petroleum segment. First interim dividend of 7.0 sen/share (ex-date: 10 Jun, payment date: 25 Jun) was declared, as expected, was declared (vs 7 sen in 1Q18).

QoQ: MISC booked in core net profit (CNP) of RM469.3m after stripping off: RM23.7m gain on business acquisition and RM17.5m vessel disposal gain. This marked a 12% QoQ improvement due to better contribution from: (i) petroleum segment as a lower vessel operating costs, and (ii) stronger LNG (+1.8x; higher number of operating vessels).

YoY: Core earnings improved by 51% from RM311.7m in 1Q18, thanks to turnaround of petroleum segment underpinned by higher freight rates and improved LNG segment (+22%; additional vessel chartering). This has cushioned impact from higher finance cost (+77%).

Outlook. LNG spot rates have moderated after the strong surge during the winter season in 1Q19 but are still likely to register YoY growth. For petroleum segment, similar trend of stronger YoY but weaker QoQ on average spot rates for VLCC, Suezmax and Aframax were observed. That said, upside could be capped by higher new builds and deliveries as well as moderating scrapping activities amidst lingering uncertainties from trade war tension between US and China. Current portfolio mix remains at 62:38 term to spot, allowing MISC to benefit the recovery of tanker rates. On the other hand, order book for heavy engineering unit increased by 5% QoQ to RM864m while tender book also improved by 15% to RM6.3bn on higher local offshore structure bids. The marine repair segment will not see further deferment by ship owners for dry-docking in 2019 in view of the forthcoming implementation of IMO in 2020. Although greenfield FPSO projects remain the growth focus for offshore segment, we do not factor any project win in the near term given the competitive landscape.

Forecast. We increased our FY19 earnings by 6% after imputing lower vessel operating costs. Meanwhile, FY21 earnings of RM1.93bn (+2% YoY) are introduced.

Maintain HOLD, TP: RM6.70. Our SOP-driven TP is increased to RM6.70 (from RM6.59) after adjusting higher PBV multiple of 0.9x for petroleum segment in view of better operating environment and MMHE’s TP to RM0.75/share from RM0.61/share previously. Note that MISC operating cash flow has improved 51% YoY in 1Q19 on the back of stronger earnings. That said, we believe MISC may want to maintain its DPS at 30 sen this year (flat YoY) for further capex expansion, implying a dividend payout of 78% and offering dividend yield of 4.6%.

Source: Hong Leong Investment Bank Research - 3 Jun 2019