MISC’s 3QFY20 core profit of RM286m (-46.3% QoQ, +6.3% YoY) and 9MFY20 core profit of RM1598m (+39.2% YoY) was within our expectations despite constituting 84% of our FY20f numbers as we expect the weak freight rate trend to continue into 4QFY20 from lower O&G demand due to coronavirus. While freight rates for its LNG segment has shown some improvement in September, spot rates for its petroleum segment remains weak at 1-3 year lows. MISC declared an interim dividend of 7.0sen/share (vs 7.0sen in 3QFY19). We maintain our HOLD rating with an SOP-derived TP of RM7.69, leaving our earnings assumptions unchanged. We believe that weaker freight rates would potentially offset the positive impact brought about by its impending capacity additions.

Within expectations. MISC recorded core earnings of RM286.2m (-46.3% QoQ, +6.3% YoY) after stripping out net impairments or provisions amounting to RM30.1m and net unrealised forex gain of RM2.2m, bringing 9MFY20 earnings to RM1,598m (+39.2% YoY) . The results constituted 84% of ours’ and 75% of consensus’ FY20 forecasts. We deem this result to be in-line with our expectations but below consensus’ as we expect freight rates remain weak in 4QFY20. Third interim dividend of 7.0sen/share (ex-date: 2 Dec 2020, payment: 15 Dec 2020) was declared, as expected (vs 7.0sen in 3QFY19) bringing 9MFY20 DPS to 21sen (vs 21sen SPLY). Its current portfolio mix for its petroleum segment is at 65:35 term to spot (VLCC: 91:9, Suezmax: 81:19, Aframax 49:51).

QoQ: MISC booked in core earnings of RM286m (-46.3% QoQ). The weaker QoQ results were primarily attributable to weaker Petroleum rates as a result of lower freight activity due to the unloading of floating storage from most players who stocked up a lot on petroleum products in 1HFY20.

YoY: Core earnings increased by 6.3% YoY due to its stronger offshore segment, offset by marginally weaker performance across all other segments.

Outlook. The significantly weaker QoQ results validates our view that most floating storage will continue to keep excess tonnage employed due to weak oil demand. 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. Suezmax and Aframax spot rates is at its lowest point in more than 3 years and VLCC spot rates are at its lowest point in 1 year. We believe that the recovery in rates are predominantly dependent upon the recovery in economic activity and oil demand. We believe that freight rates for both its LNG and Petroleum segment would only recover in 2021 if the spread of the coronavirus dissipates. However, we expect its 6 VLEC contracts secured in July to provide more support towards its earnings going forward.

Forecast. We maintain our earnings forecast as we expect weak freight rates to continue into 4QFY20.

Maintain HOLD, TP: RM7.69. We maintain our SOP-driven TP of RM7.69. We believe that MISC would be able to weather through the fluctuations in charter rates for its LNG and Petroleum segment through its capacity expansions and long-term charters for its LNG segment. However, we believe that a recovery in economic activity and oil demand would be required for us to see an uptick in freight market rates to warrant a re-rating on our call.

Source: Hong Leong Investment Bank Research - 18 Nov 2020