MISC’s 9M17 core net profit of RM1,558m was within our and street expectation as it constitutes 80% and 73% of our and street 2017E forecasts respectively. Cumulative core profit which increased 24.2% yoy was underpinned by better LNG and offshore segments performance as well as margin expansion seen in the LNG segment. The low freight rates however continue to pose a challenge resulting in wider losses at the petroleum segment. MISC declared a 7 sen interim dividend, bringing ytd DPS to 21sen. Maintain SELL.

9M17 Core Net Profit Within Expectations

MISC booked in a 3Q17 net profit of RM680.5m (+22% qoq; +407% yoy) largely on US$18m gains for the GKL adjudication win (inclusive reversal made on receivable provisions) and US$10m reimbursement of FSU Lekas. After stripping off various one offs, core net profit arrived at RM529.6m (+6% qoq; +86% yoy). LNG and offshore segments recorded higher operating profits which were partly offset by larger losses suffered in the petroleum segment.

Firmer US$ Offset Operational Weakness

Revenue in US$ terms declined 4% yoy primarily due to a weaker petroleum segment weighed down by lower tankers freight rate and earnings days. Heavy engineering segment also saw a weaker performance as most projects were near completion coupled with new projects still at early progress stage. On the whole, 3Q17 results was supported by a firmer US$ against the 5% weakening of the Ringgit.

4Q See Weaker LNG; But Lifted by Seasonally Stronger Petroleum

Average spot rates for LNG vessels were up 47% qoq in 3Q17 at US$38,608 as a result of higher demand during winter season stockpiling. However, current rates are still a far cry from previously and expected to remain subdued moving forward due to the current oversupply situation. Petroleum tanker rates for both spot and long-term markets fell by an average 40% and 5% qoq, respectively due to more new builds being delivered during 3Q. However, the higher seasonal demand is expected to provide some uplift to earnings in 4Q.

Maintain SELL With Unchanged TP at RM6.50

We make no changes to our earnings estimates. We maintain our SOPderived target price at RM6.50 with our SELL call as we believe financial performance will continue to be dragged down by depressed charter rates and low vessel utilizations.

Source: Affin Hwang Research - 6 Nov 2017