Period     1Q13/3M13

Actual vs. Expectations     The 1Q13 core net profit of RM327.9m was within our expectations as well as that of the consensus, accounting for 27.8% and 26.8% of our (RM1.18b) and the market (RM1.22b) full-year FY13 forecasts.

Dividends    No dividend was declared as expected.

Key Results Highlights      QoQ, the core net profit was down by 19.9% largely due to:   1) the LNG division earnings being lower due to pre-operating costs for two new floating storage units (FSUs) and higher vessel off-hire days for marine repair and maintenance; 2) lower offshore division earnings due to interest cost incurred for the Gumusut-Kakap project that has yet to commence operation; and 3) lower earnings from its heavy engineering division, which recorded lower sequential margins given that the Malikai project has not commenced profit recognition. 

  YoY, the core net profit was up significantly by 77.8% mainly due to lower losses from its Petroleum and Chemical divisions, which benefited from charter rates bottoming in 1Q13.

Outlook    The LNG division is likely to remain stable. However, management is only cautiously optimistic as there are signs that a large number of new-buildings will enter the market in 2014. This could flatten its forward prospects.

The Petroleum business is still tough, but the Chemical business seems to have seen some improvements, which management hopes will hold for the remaining part of the year. Lower bunker costs (-3.5% YoY) have facilitated the improvement in the two segments. 

The Offshore division could see some earnings increase with the start-up of the Gumusut-Kakap project expected in 2H13.

The Heavy Engineering division struggled with contract replenishment and as such, it could remain weak in the year.

Overall, MISC is cautiously optimistic and hopes it will be able to sustain its earnings moving ahead.

Change to Forecasts    We have reduced our estimates for the Heavy Engineering division in line with the reduction made in our previous MHB company update. However, we are imputing FY13-14 interest incomes of RM107.6m and RM85.5m, respectively, as we had previously been too conservative and had not accounted for such items. This raised our FY13-14 net profit forecasts by 5.31% and 3.82% to RM1.24b and RM1.46b, respectively (from RM1.18b and RM1.4b previously).

Rating  Raised to OUTPERFORM (from UNDERPERFORM)

Valuation     Given the uncertainty in MISC's near term performance, we are reverting to a Price/Book (P/B) valuation method for the stock. 

Based on a 1.0x FY14 P/B, our target price for MISC is RM5.04. We note that historically, the average forward P/B for the stock is around 1.16x. However, we look to further sustainability in the earnings for us to raise our target valuation to such levels.

Given the possible further improvement in its prospects, we reckon that the market has overreacted by continuing to undervalue the share price and hence, we believe that it’s an opportune time to accumulate the stock.

Risks    1) Lower than expected charter rates; and 2) a higher-than expected bunker cost.

Source: Kenanga