• 2Q20 core net profit of RM584m was in line with our expectation, making up 62% of our full-year estimate (67% of consensus), as we anticipate a much weaker 2H20 performance.
• Core net profit weaker sequentially due to the suspension of the MMHE yard, and petroleum tanker rates reversing after experiencing a temporary surge after the fallout between Saudi and Russia in March 2020
• Maintain Hold, With An Unchanged Target Price of RM7.90

Better LNG and Petroleum Cushioned MMHE Weakness

MISC’s 2Q20 core net profit grew 42% yoy to RM584m. This was largely contributed by higher LNG earnings days in the absence of dry docking activities during the quarter, and lifted by higher petroleum rates on the back of higher tanker demand following the fallout between Saudi and Russia in March 2020. 2Q20 EBITDA margin rose 2.6ppts on lower docking expenses and improvement in petroleum rates. MISC declared a 7sen DPS, similar to both 1Q20 and 2Q19, and within our expectation.

Performance Weaker Qoq as Petroleum Rates Normalize

MISC reported sequential improvement in its headline results with the absence of provisions for the Gumusut-Kakap litigation suit against Sabah Shell in 1Q20. Excluding the one-offs, 2Q20 core net profit fell 25% qoq to RM584m as revenue declined by 13% following the reversal in petroleum freight rates as OPEC allies moved to curtail global production amid weaker demand.

LNG Rates Falling on Lower Demand, Petroleum Rates Normalizing

The reduced global demand for LNG vessels saw rates declining by 16-35% across time and spot charters, compared to 6M19. This may affect the four spot charter vessels up for renewal over the next year. Term charter weightage for petroleum vessels have, however, increased to 76% vs 71% in 1Q20.

Reiterate Hold With a TP of RM7.90

We maintain our SOTP-based 12-month target price of RM7.90, implying a 19x FY21 PE (in line with its 5-year average). Given the prevailing weak environment, our current TP has not taken into account the potential award of Mero-3 FPSO – assuming a US$2bn capex, this could lift our existing TP by RM0.40/share (+5%). Maintain Hold. Upside risks to our call include a rebound in shipping charter rates and new contract wins. Downside risks include any decline in charter rates, unforeseen contract termination and unfavourable forex movement.

Source: Affin Hwang Research - 14 Aug 2020