MISC’s FY19 core profit of RM1,540.3m (+12.5% YoY) was below expectations. The earnings disappointment stems largely from a decline in JV contributions (- 11.5% YoY). Nonetheless, MISC showed great performance across its other operating segments. Declared fourth interim dividend of 9.0 sen/share and a special dividend of 3.0 sen/share bringing YTD dividend to 33 sen/share (vs. 30 sen in FY18). FY20 will see higher delivery of vessels on time charters (7 DPST) boosting the groups recurring income, whilst the disposal of the 7 chemical tankers will save c.USD20m/annum moving forward. Thus, we are keeping our earnings forecast and SOP-driven TP of RM8.26. Maintain HOLD.

Below. 4Q19 core earnings of RM392.2.3m (+45.6% QoQ, -6.5% YoY) brought FY19 sum to RM1,540.3m (+12.5% YoY). The results were below both ours and consensus expectations at 89/90% of full year estimates. The deviation namely stems from weaker JV contributions (-71.4% QoQ, -11.5% YTD). Fourth interim dividend of 9.0 sen/share and a special dividend of 3.0 sen/share (ex-date: 2 March, payment date: 17 March) was declared, as expected bringing YTD dividend to 33 sen/share (vs. 30 sen in FY18).

QoQ: MISC booked in core earnings of RM392.2m after adjusting for EI’s amounting to a net amount of RM142.3m (namely arising from a RM114.0m impairment loss on ship disposal of chemical tankers – to be completed by 1Q20 and a write offs and impairment on receivables of amounting to RM32.3). This marked a 45.6% QoQ improvement, which is inline with a seasonally stronger 4Q.

YoY: Core earnings declined to RM392.2m (-6.5% YoY from RM419.4m in 4Q18) due to lower JV contributions and softer contributions from its Offshore division (-20.0%

YoY at the operating level; additional demobilisation costs incurred in 4Q19), partially offset by improved performances from LNG division (+15.3% YoY; additional vessel chartering from 2 acquisitions and redeployment of suspended charters ) and Petroleum division (Operating profit of RM171.4m vs. -RM108.6m in 4Q18) on higher margin on freight rates.

YTD: FY19 core earnings improved by 12.5% to RM1,540.3m on the back of: i) stronger LNG contributions (higher number of operating vessels); ii) a turnaround of petroleum segment (higher margin on freight rates on geopolitical concerns and tonnage taken off the market due to IMO 2020); and iii) narrowed losses for heavy engineering division (Operating loss of -RM40.5m vs. -RM124.6m in FY18).

Outlook. LNG newbuild orders are building up as more liquefaction projects are reaching FID. For the petroleum segment, VLCC charter rates remains at a sweet spot on the back of favourable geopolitical and regulatory tailwinds for the tanker market. Currently, the portfolio mix for its Petroleum division stands at 72:28 term to spot (from 60:40 in 3Q19). 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 implementation of IMO 2020.

Forecast. Unchanged.

Maintain HOLD, TP: RM8.26. Despite the earnings disappointment, we maintain our earnings and SOP-driven TP of RM8.26. FY20 should see the delivery of 7 DPST (Shell and Equinor) which should boost the groups recurring income, whilst the disposal of the 7 chemical tankers will save c.USD20m/annum moving forward.

Source: Hong Leong Investment Bank Research - 19 Feb 2020