A  respectable  performance. MISC reported a core net profit of USD266.7m, beating our and  consensus  estimates,  reversing  from  previous year's core  net  loss  of  USD286m.  On an  apple  to  apple  comparison,  stripping  its  discontinued  liner  business,  core  earnings came  in  at  USD468m,  down  by  only  1%  y-o-y,  largely  attributed  to  the  continued  loses from  its  petroleum  and  chemical segments, although  the loses  were  cushioned  by  higher profits  from  its  offshore  and  tank  terminal  divisions.  During  the  course  of  the  year,  MISC recorded  net  exceptional  items  amounting  to  USD16.8m,  largely  attributed  to  the impairments and provisions on its tanker and liner vessels respectively, though both these costs  were  significantly  offset  by  a  substantial  one-off  gain  of  USD32.6m  from  the  50% realisation  of  intragroup  profit  from  the  Gemusut  Kakap  rig  and  a  USD91m  gain  on disposal  of  assets  through  finance  lease  recognisation  (two  FSUs  for  the  Lekas Regasification Project).  

How  the  quarter  fared.  4Q was a seasonally stronger quarter as rates for the petroleum and  chemical  shipping  segment  improved  on  the  back  of  a  demand  pick-up  from  China. LNG's profitability came in higher, noting that it was hit by plant shutdowns in 3Q. Against the  backdrop  of  higher  demand  for  oil  coupled  with  the  prolonged  winter,  the  shipping segment  is  likely  to  see  a  better  performance  going  into  1Q. We  note  that  offshore  were seasonally  weaker  but  this  was  relatively  much  better  at  PBT  level,  owing  to  the  bonus received from asset uptime performance. The tank terminal segment's earnings improved significantly by 30% due to contribution from the Tanjung Bin tank terminal.

Petroleum  still  loss-making.  While  it  appears  that  petroleum  and  chemical  tanker  rates have  hit  rock  bottom,  management  continues  to  reiterate  that  the  former  will  continue  to see rates depressed throughout 2013 as the supply glut of vessels persists, notably of the aframaxes, which MISC is heavily exposed to.  Rates are likely to be flattish and we have now  factored  that  into  our  model.  Chemical  is  expected  to  see  an  improvement  in  rates pushed by  higher  demand  as the supply  side  is more  balance.  On  the conservative  side, we  continue  to  project  losses,  though  narrowing  for  both  chemical  and  petroleum.  Profits can only be seen in FY14 for chemical and FY15 for petroleum.  

Downsizing  the  aframaxes.  MISC's capex plan will not be too aggressive other  than taking in the delivery of four VLCCs. These four VLCCs are on a time charter basis and is expected  to  be  profitable,  at  least  at  cash  operating  level.    To  contain  losses  from  the petroleum division, management is currently in the midst of disposing off at least three to four of its aframax owned and terminating four of its charters once it expires this year.
 
LNG outlook moving forward.  Management maintains a conservative stance on its LNG prospects citing  cautiousness on  potential  LNG project  delays  which could  put  downward pressure on spot rates. Its strategy remains; buy assets only when a long term charter has been secured. According to management, charters up for renewal in the near term are only to be seen sometime in FY15 and these are mostly five to 10 year charters to third parties. We do not expect any new LNG vessels into its fleet over the near term.
 
2012  a  balance  sheet  and  restructuring  story.  2012  was  the  year  of  strengthening  its balance  sheet  after  disposing  of  the  cash  burning  liner  division  and  a  50%  stake  of  the Gemusut Kakap. We note that the sale of the latter asset had significantly reduced its net gearing  from  45%  to  24%.  Moving  into  FY13,  management  will  focus  on  improving operational  efficiencies  and  cut  costs. We won't be seeing  much  improvement  from  as earnings  for  the group is  driven by  market  forces given  the  sizeable  impact  of  the overall shipping segment.

Earnings  upgraded.  Due to housekeeping and noting the fact that FY12 results came in better than we had expected, we upgrade our FY13 earnings forecast by 7.6%. However, as we have become more conservative on the outlook of the petroleum segment, we tone down  our estimate  for  FY14  by  some 8%.  We see 2013  as be  a  better  year for  MISC  as earnings  growth,  albeit  marginal,  would  be  lifted  by  its  LNG,  offshore,  tank  terminal  and heavy engineering divisions.
 
Maintain  reject  offer  and  BUY  recommendation.  We  maintain  our  call  to  BUY  and  to reject  the  cash  offer  of  RM5.30/share  made  by  Petronas.  We  have  shifted  our  valuation methodology to sum of parts now as this would give more clarity on the breakdown of each division.  Our sum of parts value on MISC is RM6.03 (versus RM6.58 previously based on price  to  book  value).  Investors  have  up  to  19  March  to  decide  whether  to  accept  the Petronas offer.

Source: OSK