MISC’s 4Q18 profit was supported by a strong performance at its petroleum shipping unit, where freight rates surged to a record high since 4Q16 on the back of positive winter demand. Nevertheless, rates are normalizing and the outlook is still rather uncertain and bleak. Hence we downgrade to SELL and lower our target price to RM5.95 post updating our model with lower MMHE figures.

In Line With Expectations

MISC’s 2018 core net profit of RM1.4bn (-34%) was in line with our and consensus forecasts – accounting for 103% and 101% of 2018 estimates, respectively. Revenue fell by 13% yoy, impacted by a lower number of operating LNG vessels, renewed lower charter rates, as well as a one-off gain from an adjudication decision on Gumusut-Kakap FLP variation works in 2017. This, coupled with the contraction in its EBITDA margin (-3ppts), higher finance costs and effective tax rate dragged down earnings.

Petroleum Drives Earnings in 4Q18

4Q18 revenue increased 5% qoq to US$573m largely driven by higher petroleum charter rates following the better seasonal winter demand, leading to a PBT turnaround (US$17m) after 3 consecutive quarters of losses. However, overall core PBT was down 1%, mitigated by a weaker LNG profit (-33%) due to the absence of deferred income from Seri Balhaf and Balqis following the suspension of the Yemen contract.

LNG and Petroleum Rates Sustainable?

The better winter demand drove petroleum and LNG spot rates in 4Q to a multi-year high, but they have since normalized in January 2019. The outlook continues to look rather uncertain, affecting the visibility in terms of rates recovery. Investment and activities in the offshore segment will likely pick up in tandem with the recent rise in global oil prices.

Downgrade to SELL

We tweak our earnings forecast by -1% to factor in our recent cut in MMHE’s (HOLD, TP: RM0.61) earnings and downgrade the stock to SELL (from Hold) with a lower target price of RM5.95 (from RM6.00). MISC declared a similar 30sen full-year DPS in 2018, in line with our assumptions, which implies a 4.3% yield. Upside risks to our call include: (i) rebound in shipping charter rates, (ii) more contract wins across the segments, and (iii) further strengthening of the US$.

Source: Affin Hwang Research - 25 Feb 2019