MISC reported a widely expected 1Q20 headline loss due to litigation provisions made following the loss of its Gumusut-Kakap adjudication claim against Sabah Shell. Excluding this, core profit was ahead of street and our estimates by 19%, primarily driven by an exceptionally strong petroleum tanker contribution, and further supported by its Offshore segment. We raise our 2020E forecast by 25% to reflect the stronger 1H20E petroleum contribution, and 2021- 22E by 7%. We raise our TP to RM6.80, but maintain our Sell rating.

Petroleum Earnings Recorded Its Best Quarter Since 2015

MISC recorded its best quarter since 2015 with 1Q20 US$ PBT soaring to US$201m (+51% yoy, +218% qoq). The main driver was attributable to a surge in petroleum segment earnings following the conflict between Saudi Arabia and Russia. Petroleum PBT rose to US$71m, higher than the US$18m recorded in 1Q19 and US$32m in 4Q19 respectively. Segmental PBT margin rose to 24.2% (vs. 6.3% and 11.6% in 1Q19 and 4Q19).

Bumper Petroleum Earnings Likely to Normalize in 2H20

The fall-out between the two major oil-producing countries in March led to the oil market flooded with supplies. The after-effects saw global oil prices plunge but resulted in a spike in petroleum tanker rates due to the sudden high demand. This benefitted MISC’s Aframax and Suezmax vessels as 34% and 65% of its fleets are available on spot hire, while VLCC is only at a low 3%. Spot rates for Aframax and Suezmax surged 72% and 151% mom in March. Based on our observation, the average petroleum tanker rates have further increased in the first week of May, continuing to be supported by high offshore storage needs amid weak global demand. We believe rates should start to normalize in 2H as OPEC allies implement the agreed 9.7mmbpd production cut starting May-20, and with oil cargoes gradually unloading with the recent strengthening in global oil prices.

Maintain Sell

Given that the bumper petroleum earnings will likely follow through into 2Q, we raised our 2020E earnings by 25% and our 2021-22E forecasts by 7% to reflect the high base rates in 2020E. We revise higher our target price to RM6.80 (from RM6.20) post earnings upgrades. However, we are keeping our Sell rating given our cautious macro stance and the weak global demand outlook, which could adversely impact LNG long-term charters. Immediate risk will be on four of its LNG vessels (14% of current fleet) up for renewal from 2Q20-2Q21, with time charter rate down 12–19% ytd.

Source: Affin Hwang Research - 12 May 2020