Results Within Expectation

•  Weaker LNG, petroleum and offshore performances in 3Q, partly boosted by higher heavy engineering activities
•  3Q20 core net profit came in at RM280m (-5% yoy), in line with expectation, as we anticipate a weaker winter season. The stellar 9M20 performance was primarily driven by the short spike in petroleum rates in 1H

•  Maintain Hold, With An Unchanged Target Price of RM6.80

MMHE Activities Partly Cushion Negative Impact

MISC’s 3Q20 revenue fell 4% yoy, dragged down by: 1) more LNG docking days and offhire of certain vessels due to COVID-19, 2) fewer operating petroleum vessels and reduction in rates, and 3) lower FSO Cendor’s and Gumusut-Kakap finance lease income, partly offset by higher heavy engineering activities. The lower revenue resulted in a 1ppt decline in EBITDA margin, contributing to the 6% yoy decline in core net profit to RM280m (9M20: RM1,641m). Results are in line with our expectation as we expect a weaker winter season to drag down earnings.

Despite new deliveries, FY21E earnings to normalise on lower petroleum rates

The petroleum charter market remained weak, affected by weaker trade volumes and ample vessel supply, putting pressure on 35% of the overall petroleum vessels on spot. Notably, more than half of its fleet were on spot charters in 3Q versus one-third in 2Q. As such, we believe this would affect the coming 4Q. Suezmax and VLCC also saw a shift towards the spot market, albeit not as much as compared to Aframax.

Reiterate Hold, TP Remains at RM6.80

MISC will see a gradual delivery of 4 LNG vessels by 1H23 and 6 VLEC vessels by 1H21. The petroleum business will see the addition of 2 VLCCs by 1H22, and 6 shutter tankers by 2H22. The main execution risk lies in Mero-3 due to its size and the absence of an equity partner for now. We did some housekeeping adjustments on our forecasts, but reiterate our SOTP-based target price of RM6.80 and Hold rating. Near-term positives look priced in, as MISC focuses on delivery execution now. Potential involvement in FPSO Limbayong may provide some upside, with the project bid expected to close in Jan-21.

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 - 18 Nov 2020