MISC’s 2QFY20 core profit of RM533.4m (-27.3% QoQ, +30.3% YoY) was within our expectations despite constituting 60% of our FY20 numbers as we expect freight rates to drop further in 2HFY20 from lower activities due to coronavirus. Freight rates for both its LNG and petroleum segments have fallen consecutively in 2QFY20 with LNG spot rates decreasing by 75% in June from its April highs. MISC declared an interim dividend of 7.0sen/share. We maintain our HOLD rating with an SOP-derived TP of RM8.48, leaving our earnings assumptions unchanged despite its c.15% increase in LNG capacity announced in mid-July. We believe that its impending capacity additions would be able to offset potentially weaker freight rates in FY21.

Within expectations. MISC recorded core earnings of RM533.4m (-27.3% QoQ, +30.3% YoY) after stripping out net impairments or provisions (RM234m), gain on disposal (RM21.6m), net unrealized forex losses (RM25.2m) and other EIs (RM3.6m) while 1HFY20 earnings stood at RM1267m (+44.2% YoY). The results constituted 60% of ours’ and 62% of consensus’ FY20 forecasts. We deem this result to be in-line with expectations as we expect freight rates to weaken in 2HFY20. Second interim dividend of 7.0sen/share (ex-date: 27 Aug 2020, payment: 15 Sep 2020) was declared, as expected (vs 7sen in 2Q19). Its current portfolio mix for its petroleum segment is at 76:24 term to spot.

QoQ: MISC booked in core earnings of RM533.4 (-27.3% QoQ). The weaker QoQ results were primarily attributable to weaker LNG rates due to the coronavirus pandemic, which slowed down general demand for LNG.

YoY: Core earnings increased by 30.3% YoY due to its stronger Petroleum segment, underpinned by higher freight rates due to the uptick in floating storage amid the collapse in oil demand from lockdown measures implemented from coronavirus.

Outlook. Despite the stellar showing in 1HFY20, we expect 2HFY20 results to be much weaker as freight rates have already fallen significantly in July as most floating storage continues to keep excess tonnage employed. Petroleum tanker rates have already fallen significantly from its highs in April as the usage of tankers as floating storage has been reduced due to production adjustments to address the oversupply in the market and increased tonnage availability amid the gradual unwinding of floating storage and weak oil demand. We believe that the recovery in rates are predominantly dependent upon the recovery in economic activity and oil demand. However we believe that freight rates for both its LNG and Petroleum segment would recover in 2021 when the spread of the coronavirus dissipates. We also expect its 6 VLEC contracts secured in July to provide more support towards its earnings going forward.

Forecast. We maintain our earnings forecast despite MISC’s strong showing in 1HFY20 as we expect a much weaker 2HFY20 due to lower freight rates from both is LNG and Chemical tanker segments.

Maintain HOLD, TP: RM8.48. We maintain our SOP-driven TP of RM8.48. We believe that MISC would be able to weather through the fluctuations in charter rates for its LNG and Petroleum segment. Despite experiencing lower rates of late, its long term charter contracts for its LNG and Petroleum business would still be able to provide the Company with sustainable earnings.

Source: Hong Leong Investment Bank Research - 14 Aug 2020