MISC’s 1Q19 results met expectations. EBITDA surged 31% yoy driven by stellar results from the petroleum segment, but this may not be sustainable in coming quarters in view of rising bunker costs. Nevertheless, we raise our 12-month target price to RM6.04 as we roll forward our valuation to 2020E and upgrade MISC to HOLD, supported by a likely decent 4.6% dividend yield.

In Line With Expectations

MISC’s 1Q19 core net profit of RM469m (+42% yoy) was in line with our and consensus forecasts, constituting 28% of full-year estimates. Revenue grew 13% yoy driven by the better LNG and petroleum segments on the back of additional contributions from four new LNG vessels and higher petroleum tankers charter rates.

Sequentially Weaker on Seasonality

Revenue fell 5% qoq due to fewer earnings days from petroleum tankers coupled with lower rates following the end of the northern hemisphere winter season. Heavy engineering also dragged down revenue due to slower project billings. Notwithstanding this, EBITDA was up 30% qoq driven by an improved margin (+13ppts) as the decline in bunker costs more than negated the drop in petroleum tanker rates.

Petroleum Rates Looking Positive

The LNG tanker rates trend has normalized back to 1Q18 levels, post the winter season. We expect rates to remain lackluster in the coming quarters although the long-term outlook remains positive. Despite weaker petroleum tankers rates following the end of the winter season, they are still showing signs of improvement from 2018 due to slower fleet growth overall.

Downside Appears Limited

We upgrade the stock to a HOLD as we believe the 4.6% dividend yield, on our estimates, would likely support the share price. We raise our 12- month target price to RM6.04 (from RM5.95) as we roll forward our valuation to 2020E. Upside risks to our call include: (i) a rebound in shipping charter rates, (ii) more contract wins across the segments, and (iii) further strengthening of the USD. Downside risks would arise from: (i) a continued decline in charter rates, (ii) unforeseen contract termination, and (iii) further RM appreciation.

Source: Affin Hwang Research - 27 May 2019