• 4Q20 headline profit was strong, but masked several one-off gains. Operationally, the petroleum segment fell deeper into loss as winter rates struggled. 2020 results met our expectations, but missed consensus

• Headline JV profit jumped 555% qoq from a one-off US$50m profit on FPSO Espirito Santo’s 5-year contract extension, which also reflected a change in accounting method to finance lease

• Maintain Hold, With An Unchanged SOTP-based Target Price of RM6.45

Headline Boosted by Construction and Contract Extension Gains

4Q20 headline profit reported a 123% yoy increase driven by construction gains from FPSO Mero-3, which amounted to US$22m, and Espirito Santo’s contract extension gain of US$50m. Stripping out the rest of exceptional items: finance lease re-measurement write-back of RM89m, PPE impairment of RM23.5m, etc, 4Q20 core net profit stood at RM164m (-41% qoq, -57% yoy), bringing full-year 2020 core profit to RM1.8bn (+16% yoy). Overall, the results achieved 97% / 84% of our and consensus forecasts. MISC’s 4Q20 revenue grew 11% yoy mainly driven by Mero-3’s construction revenue and increased activities from MMHE, its heavy engineering division. 4Q20 DPS of 12sen, brought FY20 to 33sen (similar to 2019), but higher than our earlier assumption of 30sen.

Tanker Rates Still Looking Low

The term-to-spot ratio for the petroleum portfolio mix remained unchanged at 65:35 vs 3Q20. We observed that Aframax rates have been flattish thus far up until Feb 2021, with Suezmax rates seeing a slight uptick from mid-Jan 2021 onwards, but has since weakened, while VLCC rates continue to see signs of weakness with the recent reimposition of global lockdowns.

Reiterate Hold

We raise our DPS assumption to 33sen (from 30sen) in 2021-2022E. We maintain our SOTP based target price at RM6.45, keeping our Hold rating. Tanker rates continue to look subdued so far in 2021 but could potentially creep up towards 2H21 with the recent rise in global oil prices, leading to the possibility of OPEC+ members ramping up production, on top of the demand recovery expectation as vaccines roll out. We have already factored in a 2H21 recovery in rates, but overall earnings growth will remain muted due to the high base effect in 1H20. Overall, near-term positives look priced in with no new sizeable contracts expected in the horizon as MISC focusses on delivery execution. MISC could still be bidding for FPSO Limbayong by Petronas but we expect that to contribute minimally to valuation, if awarded, due to its smaller project size.

Source: Affin Hwang Research - 19 Feb 2021