We upgrade MISC to HOLD despite lowering our target price to RM6.10 as the share price has recently corrected by ~14% and we see limited downside from here on. Management is expecting a weaker 2018E profit and 10% drop in US$ operating cash flow, but guided that it intends to maintain its 30sen DPS for a 5% yield.

Additional LNG Revenue From Recent New Deliveries

We project a 7% yoy US$ earnings growth for the LNG segment, underpinned by new LNG deliveries. Two LNG vessels, Anggun and Bakti, both on short-term charters were recently renewed, benefiting from the better spot and 1-year rates. However, by our estimates the operational growth is unlikely to be sufficient to cover the appreciation in the RM (house forecast: RM3.80:US$1), which poses ~12% downside risk purely on the currency factor.

Petroleum Is a Key Determinant in Group’s Bottom Line

We expect the petroleum shipping segment’s loss to widen in FY18E as spot charters continue to decline, coupled with newbuild deliveries flooding the already oversupplied market. MISC’s fleet of petroleum tankers are exposed and sensitive to the low spot charters as 45% of its total fleet are on spot contracts. Similar to LNG, the currency factor will likely play a role in widening the losses.

Lower Earnings on Weaker Market

We trim our FY18-20E EPS by 8-12% as we factor in lower profit margins for the LNG and petroleum segments. We also assume a 30% yoy increase in capex which will be spent on upgrading and growth expansion projects.

Upgrade to HOLD on Limited Downside and Decent Yield

We believe the current share price has reflected the market’s fear of weaker-than-expected earnings. We upgrade our call to HOLD from Sell with a lower SOTP-based target price of RM6.10 (from RM6.25), reflecting our earnings cut. We believe the current share price at a 5% dividend yield will prompt investors to hold the stock.

Source: Affin Hwang Research - 19 Jun 2018