MISC’s 1H19 results with core profit of RM879m (+39% YoY) were within expectations. The earnings improvement is largely helped by additional LNG vessel chartering, higher petroleum freight rates and narrowed losses for heavy engineering segment. Second interim dividend of 7.0 sen/share (ex -date: 27 Aug, payment date: 18 Sep) was declared, as expected (vs 7 sen in 2Q18). Both LNG and petroleum spot rates are expected to demonstrate YoY growth on improved market conditions. Despite keeping our earnings forecast, our higher SOP-driven TP is upped to RM6.99 (from RM6.70) after imputing higher valuation on petroleum and heavy engineering segments.

Within expectations. 2Q19 core earnings of RM409.4m (-13% QoQ, +27% YoY) brought 1H19 sum to RM878.7m (+39% YoY). The results were within both ours and consensus expectations at 51% of full year estimates. Second interim dividend of 7.0 sen/share (ex-date: 27 Aug, payment date: 18 Sep) was declared, as expected (vs 7 sen in 2Q18).

QoQ: MISC booked in core earnings of RM409.4m after stripping off USD10m one off gain on FPSO Ruby II contract extension and RM51.1m impairment loss on ships, offshore floating asset and other investments. This marked a 13% QoQ decline due to weaker contribution from petroleum segment as a result of seasonally lower freight rates.

YoY: Core earnings increased by 27% from RM322.6m in 2Q18, thanks to turnaround of petroleum segment underpinned by higher freight rates and improved LNG segment (+16%; additional vessel chartering). This has cushioned impact from higher finance cost (+16%).

YTD: 1H19 core earnings improved by 39% to RM878.7m on the back of (i) stronger LNG (+17%; additional vessel chartering), (ii) turnaround of petroleum segment and (iii) narrowed losses for heavy engineering division.

Outlook. LNG spot rates remained soft seasonally in 2Q19 after the strong surge during the winter season in 1Q19 but are still likely to register YoY growth for 2H19. For petroleum segment, similar trend of stronger YoY but expect unexciting 3Q19 before entering winter season in 4Q19. Current portfolio mix shifted to 65:35 term to spot from 62:38 previously, allowing MISC to reduce exposure in charter rates volatility. Following the recent Kasawari EPCIC project win, heavy engineering segmental orderbook has increased by 2.4x to RM3.0bn while tender book has reduced to RM3.2bn, of which, bulk of it is attributable to offshore fabrication work. Marine segment is expected to improve in 2H19 on the back of higher dry docking activities coupled with upgrading and retrofitting work for LNG vessels with the imminent implementation of IMO 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. Unchanged.

Maintain HOLD, higher TP: RM6.99. Our SOP-driven TP is increased to RM6.99 (from RM6.70) after adjusting higher PBV multiple of 1.0x for petroleum segment in view of better operating environment and MMHE’s TP to RM0.89/share from RM0.75/share previously. Note that MISC operating cash flow has improved 45% YoY in 1H19 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 4.1%.

Source: Hong Leong Investment Bank Research - 15 Aug 2019