MISC’s 2019 results were in line with our forecast but missed consensus. Both the LNG and petroleum segments posted stronger earnings on commencement of additional vessels and a recovery in freight rates. The heavy engineering (MMHE) segment also saw a huge jump in profit on larger variation orders claimed and a 4Q IRB tax refund. We cut our earnings forecasts by 4-5% on the back of anticipated weaker global demand and lower our target price to RM8.08 (from RM8.40). Maintain Hold.

Better LNG and Petroleum, Offshore Saw Weakness

MISC’s 4Q19 core net profit came in 8% lower yoy largely attributable to a gain recognised from an offshore contract extension. For the full year, core net profit was up 10% yoy to RM1.56bn largely driven by: i) a recovery in petroleum freight rates (L/PBT swung from US$43m loss to US$42m profit), ii) 2 LNG vessels commenced operation in December 2018 and January 2019, coupled with the resumption of 2 Yemen LNG vessels on spot charter which were previously suspended (PBT increased by US$39m), and iii) narrowing in MMHE losses (from US$30m LBT to US$10m PBT) on improved marine activities, larger VO claims (estimated total US$10m) and IRB refund of US$2m.

Impact From COVID-19 Is Expected to be Minimal

MISC shared in the post-results conference call that it has minimal business dealings with China. Among the fleet of vessels, only the chemical and VLCC tankers have exposure to China; however, management did not disclose the number of actual vessels. Management was also not able to share any potential impact from the global economic slowdown; however, we believe the risk could be low for the LNG segment as 27 out of 29 vessels are running on long-term charter with 2 vessels expiring end 2022 and 2023. For the petroleum segments, any negative impact from a potential demand slowdown could be partly offset by utilisation of vessels for inventory stock-piling.

Cutting Earnings Forecasts by 4-5%, Lowering Target Price to RM8.08

However, we see risks from a global economic slowdown affecting MISC’s petroleum vessels, as 28% of its vessels are on spot charter. We cut our 2020-21E EPS by 4–5% imputing a slowdown on the back of a more cautious external environment, partly offset by additional vessels which MISC is expected to take delivery (Figure 7). We lower our SOTP-based target price to RM8.08 (from RM8.40) but maintain our Hold rating.

Risks

Upside risks include: (i) a rebound in shipping charter rates, (ii) more contract wins across the segments, and (iii) further strengthening of the USD. Downside risks: (i) a continued decline in charter rates, (ii) unforeseen contract terminations, or (iii) further RM appreciation.

Source: Affin Hwang Research - 19 Feb 2020