MISC’s 1H18 revenue and net profit of RM4,163m and RM632m achieved 45% and 40% of our full-year estimates. While revenue was broadly within our expectations, the higher bunkering costs in 2Q18 resulted in a slight deviation against our earnings forecasts. MISC declared similar 7sen DPS in 2Q18 (1H18: 14sen). Maintain HOLD but with a slightly lower TP of RM6.05.

Headline Revenue Up 2%, But Reported Impacted by Weaker Currency

Overall 2Q18 revenue in US$ terms was up 2% yoy to US$543m, mainly supported by the higher earnings days from the delivery of six petroleum vessels. Offshore and heavy engineering revenues were relatively flat yoy. Meanwhile, the LNG segment suffered a 10% yoy decline to US$151m due to lower charter rates and operating vessel days. As a result of the 10% yoy appreciation of the RM vs. the USD, 2Q18 revenue in local currency fell by 7% to RM2,142m. Headline PBT fell by 32% yoy to US$80m, mainly weighed down by higher petroleum-bunking costs, higher heavy-engineering cost provisions and interest costs.

Muted Outlook Ahead Taken Into Account

LNG shipping rates continue to be under pressure due to the overcapacity in the market. Nevertheless, management expects a rise in demand as China increases LNG orders in the coming quarters. Petroleum tankers rates continue to decline, possibly close to their lowest levels since 2014. Nevertheless, management expects demand to improve on the back of OPEC raising its production output of late. Current petroleum and chemical mix is at 59:41 term to spot.

Maintain HOLD With a Slightly Lower TP of RM6.05

We revise down our 2018E earnings by 10% primarily to factor in the higher bunkering costs as we understand that the cost might not be fully passed-through to clients. We maintain our HOLD call but trim our SOTPderived 12-month TP to RM6.05 (from RM6.10). Upside risks to our call include: (i) rebound in shipping charter rates, (ii) more contract wins across the segments, or (iii) further strengthening of the USD. Downside risks would arise from: (i) continued decline in charter rates, (ii) unforeseen contract termination, or (iii) further RM appreciation.

Source: Affin Hwang Research - 8 Aug 2018