MISC reported another quarter of losses but as management has indicated that the worst has  come to  pass, the earnings  outlook  for the remainder of the year could improve significantly. More importantly, we think MISC's share price has been unjustifiably bashed down. Currently trading at 0.8x P/BV, the stock offers a cheap LNG play (its LNG division is  valued at RM5.10), with all  of  its other businesses  being  essentially free. Maintain BUY, at a lower FV of RM6.45, premised on 1.3x P/BV.  

Still swimming in losses but margins improve. MISC continued to be mired in losses, booking a net loss of USD152m in 1QFY12. Stripping out the exceptional items relating to asset impairments and provisions from the chemical and liner side  amounting to USD139.6m, the core net loss stood at USD12.4m (q-o-q: -2%, y-o-y: NM) on the back of  revenue of  USD785.5m (q-o-q:  -14%, y-o-y:  -18%).  The weaker revenue was attributed to the liner business from which MISC is gradually exiting, which saw revenue sink  53% q-o-q and 65% y-o-y. By segment, the petroleum, liner and the chemical divisions still racked up losses due to supply-demand imbalance as well as moderating economic  growth  in China. We deem the  overall  results  short of our and consensus expectations, although the group's top-line was in line with our estimates, coming in at 22% of our full-year forecast. On a more  positive note, since its gradual  exit from the loss-making liner division, MISC's core operating margins  have  improved, with its EBITDA margin  nudging up by 2.4ppts q-o-q to 15.27%, although  this was still lower than that in the corresponding quarter last year.

Highlights  from analyst briefing. In the immediate term, management believes that it has put the worst quarter behind as it expects losses from the liner division to contract significantly. It also sees higher earnings contribution for the rest of the year from: (i) the commencement of its 2 FSUs for the re-gasification plant in Melaka in September,  (ii) the delivery of 3 Suezmax and 2 shuttle tankers, (iii) a charter for a chemical tanker in 3Q (on a time charter basis, which is already in the money), and (iv) a sharp reduction in losses from the liner segment. As far as medium- to longer-term developments go, on top of the contribution from the Gemusut Kakap FPS by 2013, management is assessing the possibility of acquiring a stake in a new LNG train capacity expansion  project  in Bintulu with Petronas, from which the returns are far more attractive than that from LNG. An announcement  on this  venture is expected to be  made sometime this year. Elsewhere, to cater to the higher volume from Bintulu come 2016, MISC would need to buy  at least 3 more LNG tankers. As  highlighted  earlier  in  the past few quarters, management feels that it is highly unlikely that demand in the petroleum segment would recover  by 2013 as  new tonnage capacity  enters  the market.  It expects the chemical segment to fare better as the oversupply in the shipping subsector is the least acute.

Source: OSK