MISC's 3QFY12 core earnings tumbled 63% y-o-y and 74% q-o-q, dragged down by provisions for FSPO Cendor in the heavy engineering unit and lower earnings from the  petroleum  tanker  shipping  unit.  Nonetheless,  we  deem  its  earnings  in  line, making  up  68%  of  our  full-year  forecast  although  missing  consensus  estimates. Management  guided  that  4Q  will  see  better  profits  due  to  seasonally  higher shipping  demand  during  the  winter.  We  expect  its  exit  from  the  loss-making  liner business  to  translate  into  stronger  FY13  earnings,  which  we  project  to  surge  by 71%. Maintain BUY, at RM6.58 FV.  

Within. MISC's 3QFY12 core earnings sank 63% y-o-y and 74% q-o-q due to the massive 91% and 50% y-o-y drops in PBT from Malaysia Marine Heavy Engineering (MMHE) and petroleum  shipping.  For  9MFY12,  the  group's core  net  profit  fell  30%  to  USD152m, making  up  only  68%  of  our  full-year  estimates  but  64%  of  consensus'  forecast.  4Q  is typically  a  seasonally  stronger  quarter  for  MISC  as  the  petroleum  and  LNG  segment experiences heightened shipment activities due to the winter.

Hit  by  MMHE,  petroleum.  The  substantial  drop  in  MMHE's  earnings  was  due  to  hefty provisions made for FPSO Cendor while the petroleum segment saw revenue weaken by 12% y-o-y due to lower shipping rates coupled with high bunkering costs, which were up by 7% y-o-y. In addition, PBT from the LNG unit also weakened by 13% y-o-y as a result of higher dry docking activities although this was offset by a 1-month contribution from the two  FSUs  (Floating  storage  unit)  for  the  Melaka  re-gasification  plant  amounting  to USD4m-USD5m.  As  the  provisions  for  FPSO  Cendor  relates  to  costs,  we  have  not included  this  into  our  computation  for  the  exceptional  items  as  the  numbers  were  not disclosed.  For 3QFY12,  exceptional  items  totalled a  net  gain  of  USD17m, largely  due  to unrealized  forex  translation  gains  of  USD21m,  a  USD2.7m  write-back  on  liner  vessels which were offset by a USD7m impairment on vessels.

4Q to be commendable. Management guided that 4Q will see better profits in view of the absence  of provisions  from  MMHE and  seasonally  stronger  shipping  demand due  to  the winter  season.  Key  highlights  from  the  analyst  briefing  yesterday:  i)  the  outlook  on  the petroleum  and  chemical  shipping  space  will  continue  to  be  challenging,  ii)  the  Gumusut Kakap FPSO (floating production, storage and offloading) is expected to start contributing revenue  mid  next  year  and  the  completion  of  its  proposed  sale  would  pare  down borrowings  substantially,  iii)  delay  in  the  commencement  of  the  re-gasification  plant  will not hit earnings from its FSUs as these FSUs have been delivered for storage.

Maintain BUY. With its earnings intact, we maintain our FV at RM6.45 based on 1.3x P/B. 

Source: OSK