MISC’s 9M19 core profit of RM1,193m (+25.6% YoY) were within expectations. The earnings improvement was 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: 26 Nov, payment date: 10 Dec) was declared, as expected (vs. 7 sen in 3Q18). Both LNG and petroleum spot rates are expected to demonstrate YoY growth on improved market conditions. Despite keeping our earnings forecast, our SOP driven TP is upped to RM8.26 (from RM7.35) after imputing higher valuation on the petroleum division in view of the tailwinds for charter rates. Maintain HOLD.

Within expectations. 3Q19 core earnings of RM269.3m (-34.2% QoQ, -14.8% YoY) brought 9M19 sum to RM1,148.1m (+20.8% YoY). The results were broadly inline with both ours and consensus expectations at 66/64% of full year estimates, as we expect a much seasonally stronger 4Q19. Second interim dividend of 7.0 sen/share (ex-date: 26 Nov, payment date: 10 Dec) was declared, as expected (vs. 7.0 sen in 3Q18).

QoQ: MISC booked in core earnings of RM269.3m after stripping off EI’s amounting to a net amount of RM3.2m (namely arising from a RM50.0m impairment loss on ship disposal of 7 chemical tankers – to be completed by 1Q20 and a write back of provision of c. RM45m from Brazil). This marked a 34.2% QoQ decline due to weaker contribution from the offshore segment as a result of lower revenues and recognition of one off demobilisation costs (FSO – Angsi).

YoY: Core earnings declined (-14.8% YoY from RM315.9m in 3Q18) due to lower JV contributions (after adjusting for a write back of RM45m) and softer contributions from its Offshore division (-16.4% YoY at the operating level, post adjustments on one off reimbursement cost on towing and installation), partially offset by improved performances from LNG division (+11.5% YoY; additional vessel chartering and lower dry docking activities) and Petroleum division (Operating profit of RM21.0m vs. - RM54.4m in 3Q18).

YTD: 9M19 core earnings improved by 20.8% to RM1,148.1m on the back of: i) stronger LNG contributions (lower dry docking activities and additional vessel chartering); ii) a turnaround of petroleum segment (higher margin on freight rates on geopolitical concerns and tonnage taken off the market in preparation for IMO 2020); and iii) narrowed losses for heavy engineering division (Operating loss of -RM42.5m vs. -RM64.3m in 9M18).

Outlook. LNG spot rates have surged in anticipation of strong demand from the upcoming winter season amidst scarce tonnage availability. For petroleum segment, VLCC charter rates have surged on the back of favourable geopolitical and regulatory tailwinds for the tanker market. Currently, the portfolio mix for its Petroleum division stands at 60:40 term to spot (from 65:35 in 2Q19). We continue to expect heavy engineering segment to improve moving forward due to higher dry docking activities coupled with upgrading and retrofitting work for LNG and petroleum vessels with the imminent Jan 2020 implementation of IMO 2020.

Forecast. Unchanged.

Maintain HOLD, higher TP: RM8.26. Our SOP-driven TP is increased to RM8.26 (from RM7.35) after adjusting for higher PBV multiple of 1.5x for petroleum segment (from 1.0x) in view of better operating environment. Despite the higher capex commitment by the management, we expect MISC to maintain its DPS at 30 sen this year (flat YoY), implying a dividend payout of 78% and offering yield of 3.6%.

Source: Hong Leong Investment Bank Research - 14 Nov 2019