MISC’s 2Q19 earnings was in line with expectations, supported by stronger performances at both its LNG and petroleum segments. We raise our 12-month target price to RM6.82 as we ascribed a higher valuation multiple for the offshore & petroleum segment, but maintain our HOLD rating. MISC has declared a similar quantum of DPS as in 2Q18; thus, we expect the full-year 2019 dividend payout to likely be unchanged at 30sen.

Better Petroleum Margins; Heavy Engineering Saw Losses Narrow

The stronger yoy core net profit growth (+16%) in 2Q19 was mainly driven by better margins at the petroleum segment (+9ppts yoy), while LNG and offshore margins also held up nicely at +4ppts yoy. Heavy engineering margins also showed improvement as losses narrowed on the back of lumpy variation orders recognized in 2Q19.

Softer 3Q Expected Before a Pick-up in 4Q

The trend in LNG tanker rates in 3Q has improved following the seasonally weaker 2Q. However, 4–5 of MISC’s LNG tankers (out of a total of 29 tankers) will undergo dry docking activities in 2H19. For the petroleum segment, MISC took a more defensive approach by shifting more of its tankers to term charters (2Q19: 65% vs 62% in 1Q19). With only VLCC tanker rates showing improvement in 3Q19 (while still stronger yoy for the rest of the vessels), the petroleum segment in 3Q19 will likely be weak, partly affected by higher bunker costs, which surged from the middle of June to July before falling sharply, following the correction in global oil prices in August. Demand and rates are expected to pick up in 4Q due to seasonality.

HOLD With a Higher TP of RM6.82

We maintain our earlier 10x EV/EBITDA ascribed on the LNG segment, but raised offshore and petroleum segments to 7x (from 6x), in line with its global peers. This resulted in a higher target price of RM6.82 (from RM6.04). Dividend yield are relatively decent at 4.1%, on our estimates. Reiterate HOLD rating as valuation looks fair, trading at +0.5SD above its 5-years mean of 17x.

Source: Affin Hwang Research - 15 Aug 2019