MISC’s 1Q18 core net profit of RM312m missed our and consensus expectations. Management cautioned for a more challenging year ahead as a result of prolonged weakness in the petroleum and chemical segments, at least over the next 2 quarters. MISC declared a similar 7sen dividend as in the previous year. We cut our earnings forecast and lower our TP to RM6.25 (from RM6.85). Downgrade to SELL.

Wider Petroleum Losses - a Miss on Expectation

1Q18 core net profit of RM312m missed both our and consensus forecasts by 9% and 11% respectively. Deviation against our earlier assumption was mainly due to the prolonged weakness seen in the petroleum segment where freight rates continued to fall. In addition, the LNG segment in 1Q18 also recorded a weaker performance due to lower operating vessels and charter rates on contract renewal. Heavy engineering also struggled as Bokor CPP is still at an early stage of execution hence resulting in low revenue recognition, while old projects are at tail end of completion.

Business Updates

March LNG spot rates have fallen back to Oct-17 level of US$42,500/day (-33% mom, -6% qoq) following the diminishing winter demand. LNG Seri Bakti and Seri Anggun were extended with a slightly better charter rates for another 18 and 12 months until 2019. Its 4th Seri C LNG vessel, Seri Camar has also been recently delivered end Feb-18. On the other hand, the petroleum segment will continue to put pressure on the Group’s overall profitability as losses widened with charter rates down by 20% qoq and 26% yoy across the VLCC, Suezmax and Aframax. Current term to spot mix is at 55:45. Meanwhile, management remains confident on securing a few contracts in the offshore segment.

Downgrade to SELL on Lackluster Outlook

All in, management is expecting a weaker set of results for 2018E compared to 2017. As such, we cut our FY18E earnings by 13% to factor in lower petroleum charter rates and FY19-20E earnings by 3-4%. We downgraded MISC to a SELL and lower SOTP-derived TP to RM6.25 (from RM6.85). Upside risks to our call include: (i) a rebound in shipping charter rates; and (ii) further wins of offshore contracts.

Source: Affin Hwang Research - 15 May 2018