MISC’s 9M18 core PATAMI of RM1bn fell below expectations - achieving 68% and 67% of our and consensus full-year estimates. The main drag was due to the weaker LNG performance as a result of higher dry docking activities. While 4Q earnings may improve due to seasonality, we remain wary on its cash flow position, which may potentially disappoint on the downside vs an earlier guided 10% decline. Nevertheless, we believe this would not distort the 30sen DPS payout. MISC declared another 7sen DPS in 3Q18, bringing cumulative 9M18 payout to 21sen, similar to last year. Maintain HOLD with a lower TP of RM6.00.

Poorer Results Yoy

MISC recorded overall weaker 3Q18 results as core PATAMI fell 40% yoy due to (i) LNG earnings decline following Puteri Firus’ renewal in October 2017 resulting in lower earnings days and charter rates as well as higher dry docking costs incurred, and (ii) wider losses in heavy engineering as a result of higher costs from conversion works. FSO Mekar Bergading from Offshore commenced operation in 3Q18, which partially helped to offset the weaker results.

Stronger Winter Demand to Support 4Q Earnings

We lower our 2018E forecasts by 6% factoring in longer docking for its LNG vessels in 3Q. Nevertheless, we can expect a 4Q sequential improvement supported by better shipping rates on the back of seasonal winter demand, narrowing in heavy engineering losses and stronger US$ impact.

Maintain HOLD With Lower TP of RM6.00

We maintain our HOLD call but trim our SOTP-derived 12-month TP to RM6.00 (from RM6.05). Dividend yields are fairly attractive at 4.5%. Upside risks to our call include: (i) rebound in shipping charter rates, (ii) more contracts win 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 - 21 Nov 2018