MISC’s 4QFY20 core profit of RM519m (+81.3% QoQ, +32.3% YoY) and 12MFY20 core profit of RM2119m (+37.6% YoY) was above our expectations (111%) but within consensus’ (104%) as its offshore segment has performed better than expected. While freight rates for its petroleum segment remains weak, we believe that 1QFY21 will be its trough as the shipping industry is expected to recover in tandem with O&G and the global economy. We upgrade our Hold rating to a BUY leaving our SOP-derived TP unchanged at RM7.69. We foresee sequential improvements in freight rates going towards the end of FY21 but expect 1HFY21 average rates to remain significantly weaker YoY.

Above expectations. MISC recorded 4QFY20 core earnings of RM519m (+81.3% QoQ, +32.3% YoY), bringing the FY20 sum to RM2,119m (+37.6% YoY) after stripping out (i) write off of receivables and loss on re-measurement of finance lease receivables: RM846m (ii) provision of litigation claims: RM1,049m, (iii) impairment losses: RM366m and other items. The results constituted 111% of ours’ and 104% of consensus’ FY20 forecasts, beating our expectations but within consensus. The positive results surprise resulted from better-than-expected offshore contribution from the extension of Espirito Santo’s lease contract in 4QFY20. Portfolio mix for its petroleum segment is at 65:35 term to spot (VLCC: 94:6, Suezmax: 68:32, Aframax 51:49).

Dividend. Fourth interim dividend of 12.0sen/share (ex-date: 4 Mar 2021, payment: 16 Mar 2021) was declared, as expected (vs 12.0sen in 4QFY19) bringing 12MFY20 DPS to 33sen (vs 33sen SPLY).

QoQ: Core earnings were up 81.3% due to stronger offshore segment resulting from the recognition for the extension of Espirito Santo’s lease contract by 5 years (USD50m) and recognition of construction profit for Mero 3 (USD22m).

YoY: Core earnings were up 32.3% for the same reasons mentioned above, offset by weaker petroleum segment contribution due to significantly lower YoY freight rates.

YTD: Core earnings were up 37.6% YoY due to significantly higher freight rates in 1HFY20 as activity levels picked up significantly when companies rushed to store excess oil supply in storage units due to the Covid-19 pandemic.

Outlook. While petroleum tanker freight rates have continued to fall based on MISC’s Jan newsletter, we believe that current rates are close to its trough and we expect freight rates to increase in 2HFY21 due to increased activity from higher oil demand as a result of successful vaccine rollouts, supported by a stronger recovery in China and India’s economy. MISC is also expected to complete its delivery of its 5 VLEC vessels by 1HFY21 and this should be more positive to 2HFY21 profit. We believe that 1QFY21 would be its weakest quarter for its petroleum segment and we expect sequential improvements from 2QFY21 onwards, with the biggest improvements expected in 2HFY21.

Forecast. Unchanged. Despite our expectations on sequential improvements heading into FY22, 1HFY21 freight rates are still expected to be significantly weaker YoY.

Upgrade to BUY with unchanged SOP-derived TP of RM7.69. We upgrade our call from Hold to BUY leaving our TP of RM7.69 unchanged as we opine that the shipping industry is turning for the better. MISC’s share price has declined by c.16% since its high of RM7.60 in mid-Nov, giving sufficient buffer to now warrant a BUY rating as oil demand and freight activity should start picking up in 2HFY21, in tandem with O&G and the global economy.

Source: Hong Leong Investment Bank Research - 25 Feb 2021