MISC’s 1Q21 core profit of RM438m (-15.7% QoQ, -40.3% YoY) was within our (23%) and consensus’ (22%) expectations as we believe that freight rates for 1Q21 are at its trough and the shipping industry is expected to recover in tandem with O&G and the global economy. Hence, we maintain our BUY call at unchanged SOP-derived TP of RM7.69. We foresee sequential improvements in freight rates going towards the end of FY21 due to (i) increased economic activity from lower Covid-19 cases and higher vaccination rollouts in the US and Europe (ii) higher global demand of crude oil, and (iii) higher crude oil production and refinery run rates. Nevertheless, we expect 1HFY21 average freight rates to remain significantly weaker YoY.

Within expectations. MISC recorded 1Q21 core earnings of RM438m (-15.7% QoQ, - 40.3% YoY) after adjusting for (i) impairment on assets and receivables: RM33.1m (ii) unrealised forex gain: -RM20.0m and (iii) other items: -RM4.9m. The results were within expectations constituting 23% of ours’ and 22% of consensus’ FY21 forecast. Portfolio mix for its petroleum segment is at 67:33 term to spot (VLCC: 89:11, Suezmax: 74:26, Aframax 54:46).

Dividend. First interim dividend of 7.0sen/share (ex-date: 25 May 2021, payment: 9 Jun 2021) was declared, as expected (vs 7.0sen in 1Q20).

QoQ: Core earnings were down -15.7% due to (i) lower freight rates, (ii) lower availability of ships due to the congestion of the Suez Canal and (iii) heavier losses from MMHE as a result of additional cost provision recognised for one of its offshore projects from the revision of its completion target date, mitigated by stronger petroleum and LNG segment performance.

YoY: Core earnings were down -40.3% for the same reasons mentioned above and higher operating cost due to additional SOP implemented from the Covid-19 pandemic.

Outlook. We believe that the shipping industry has reached its trough with regards to freight rates and we expect freight rates to improve sequentially until the end of FY21. Our expectations on sequential freight rate increases are premised upon (i) The recovery of the US and European economies from Covid-19, (ii) higher demand for crude oil and (iii) higher global production of crude oil and higher refinery run rates. We believe that the increased demand coming from US, Europe and China for freight activities would more than offset the weakness from India, which is experiencing an exponential increase in Covid-19 cases. We opine that the recent uptrend in crude oil prices and higher production from OPEC+ are also leading indicators towards the positive outlook on the sector.

Forecast. Unchanged.

Maintain BUY with unchanged SOP-derived TP of RM7.69. We maintain our BUY rating leaving our SOP-derived TP of RM7.69 unchanged as we view that the shipping industry is turning for the better. We opine that oil demand and freight activity has already started to pick-up, in tandem with O&G and the global economy.

Source: Hong Leong Investment Bank Research - 7 May 2021