MISC’s 1Q20 core profit of RM733.5m (+87.0% QoQ, 56.3% YoY) was above expectations. The stronger than expected earnings were due to the petroleum segment which is enjoying above average freight rates due to the shortage of onshore storage. Declared first interim dividend of 7.0 sen/share. Maintain BUY call and higher SOP-driven TP of RM8.98 (from RM8.26) post annual report adjustments for net debts and ascribing a higher PB multiple for the tanker segment (2x from 1.5x) to better reflect the premium ascribed to tanker asset values in light of this scarcity for offshore storage. MISC is a rare diamond in this global economic climate and is an MCO proof stock, yielding 3.8%.

Above. MISC recorded core earnings of RM733.5m (+87.0% QoQ, 56.3% YoY) in 1Q20. The results were above both ours and consensus expectations at 38.4%/44.3% of full year estimates. The stronger than expected earnings arises from the petroleum segment enjoying above average freight rates due to the shortage of onshore storage. In deriving our core earnings, we adjusted for EI’s amounting to a net amount of RM1.9bn - key ticket items being (i) RM1.1bn provision for litigation claims and (ii) RM935.2m for write off in trade receivables and loss on re-measurement of finance lease receivables, both EI’s relates to the Sabah Shell Petroleum Co arbitration decision announced recently. MISC declared first interim dividend of 7.0 sen/share (ex-date: 22 May, payment date: 9 June).

QoQ: MISC booked in core earnings of RM733.5m after adjusting for EI’s amounting to a net amount of RM1.9bn: (i) RM1.1bn provision for litigation claims and (ii) RM935.2m for write off in trade receivables and loss on re-measurement of finance lease receivables (iii) forex gains of RM44.7m and (iv) c.RM43m in write backs from the offshore segment. This marked a 87.0% QoQ improvement, which was driven by the Petroleum segment (PBT: +120% QoQ) on higher time charter earning equivalent. The percentage of the number of days that the tanker fleet were on the spot market in 1Q20 is as follows: VLCC 3%, Aframax 34% and Suezmax 65%.

YoY: Core earnings improved from RM469.3m (+56.3% YoY) to RM733.5m in 1Q20 due to the same above mentioned factors. The petroleum division saw PBT margins jumping from 6.3% in 1Q19 to 24.2% YoY on higher freight rates.

Outlook. LNG newbuild orders could be delayed due to the weaker global economic outlook. For the petroleum segment, Petroleum tanker rates should remain at a sweet spot throughout 1H20. Currently, the portfolio mix for its Petroleum division stands at 71:29 term to spot. MISC is pressing for a review of the judgement it received against Sabah Shell Petroleum Co. We understand that what has been provided for is defensible as guided by their legal counsel. There is an incentive to settle the case swiftly as there is a penalty of 6.65% compounded interest charged on the amount outstanding. Worst case scenario, the review will drag on for a further 3 years assuming Shell and MISC cannot come to a common ground. No cash impact to the balance sheet pending resolution of the litigation.

Forecast. We adjust our FY20 earnings upwards by 11% as we factor in the higher average petroleum tanker charter rates for FY20. We keep our FY21 numbers relatively intact assuming that the charter rates will normalize. We introduce our FY22 numbers.

Maintain BUY, TP: RM8.98. Maintain BUY call and higher SOP-driven TP of RM8.98 (from RM8.26) post annual report adjustments for net debts and ascribing a higher PB multiple for the tanker segment (2x from 1.5x) to better reflect the premium ascribed to tanker asset values in light of this scarcity for offshore storage. MISC is a rare diamond in this global economic climate and is an MCO proof stock, yielding 3.8%.

Source: Hong Leong Investment Bank Research - 12 May 2020