MISC’s FY17 core net profit of RM2,145m was ahead of our forecast, but in line with street expectation. In 4Q, MISC made impairment charges on 5 LNG (2 on spot terms, 3 as contracts expired) and 7 chemical vessels. A 9sen DPS was declared, bringing the full-year DPS to 30sen (similar to FY16). We upgrade the stock to a HOLD from SELL and lift our 12-month target price to RM6.85 on the back of a better-than-expected company outlook.

Results Above Our Estimates

Stripping off the RM554m impairment on LNG/chemical vessels, US$40m write-back of receivables for the MOPU termination and US$32m impairment made on the Yemen LNG, MISC booked a 4Q core net profit of RM587m. All in, FY17 core net profit of RM2,145m tracked 8% ahead of our expectation, but was in line with consensus estimate. The deviation against our forecast was due to better-than-expected margins. On a cumulative basis, the LNG and heavy engineering divisions reported stronger profits on the back of maiden contributions from 3 newly delivered Seri C class vessels and higher variation orders (VOs).

4Q Revenue Supported by LNG and Offshore Divisions

MISC’s 4Q US$-reported revenue increased 4.3% yoy on the back of the: (i) maiden contribution from the Seri C class LNG vessels - Cenderawasih and Cempaka; and (ii) lower demobilization reimbursable revenue recognized at the Offshore division. However, this was weighed down by: (i) lower petroleum tanker freight rates and (ii) a weaker heavy engineering division owing to the lack of work executed. The firmer Ringgit against the US$ (+4%) also dampened the overall revenue.

Upgrade to HOLD With Higher TP of RM6.85

Overall, MISC saw a decent recovery in the LNG division as delivered new builds helped support the negative impact from the low rates. Offshore performance was relatively flat, while petroleum freight rates remained challenging, although not as bad as we had expected. Heavy engineering profit was stronger due to the higher VOs being recognized. We raise our 2018-19 earnings forecasts by 12%-13% mainly to reflect improved assumptions for the LNG and Petroleum divisions. As a result, we upgrade MISC to a HOLD (from Sell) and lift our SOTP-derived TP to RM6.85 (from RM6.50).

Source: Affin Hwang Research - 13 Feb 2018