Whilst the run-up in MISC’s share price post its 1QFY13 results was warranted, we are staying conservative on further near-term gains as we believe the company is still likely to  continue being plagued by several factors that are now still affecting the shipping industry; namely the: 1) Sluggish and volatile charter rates; and  2) Continual vessel overcapacity. We have increased our FY14-15E forecasts by 1.1% and 4.8% respectively as we fine-tuned our USD/MYR exchange rates to RM3.09 and RM3.04 respectively, from RM3.06 and RM2.91 previously. This leads to a higher target price of RM5.06/share (from RM5.04/share). However, given the limited upside (total return of less than 1%) from  current share price, we are downgrading the stock to an UNDERPERFORM call from OUTPERFORM. 

Recent run-up in share price warranted.  Post its 1QFY13 results, MISC’s share price has been increasing steadily (+19.8%) from RM4.39. We believe the run-up is warranted given it was discounted too significantly by the market, post the failure of the privatisation bid by Petronas. Whilst the downside risks to earnings seem fairly limited going forward, we still believe that the overall global uncertain shipping sentiment will weigh-in on MISC’s earnings prospects.

Shipping charter rate trends remain sluggish and/or volatile. According to Fearnley’s research, the tanker and LNG charter rates were on an overall downtrend in 2QCY13; with the LNG segment recording the lowest drop of 12.3% even after the significant average 10.6% drop recorded in 1QCY13. The tanker segments saw a milder drop of 2.3% which was in contrast to the average charter rate increases of 1.6% in 1QCY13. The continued volatility in the tanker segment is not surprising given the oversupply in such vessels capacity and the uncertain near term global outlook. However, we are concerned for the LNG segment as the expanding LNG vessel newbuilding and potential delays in LNG  projects (especially from Australia) could lead to a continued moderation in charter rates for the upcoming projects. MISC’s LNG segment accounts for  c.64-67% of our FY14-15 revenues and c.63.5-64.8% of FY14-15’s EBIT.

Flattish bunker costs encouraging, but potentially not enough to reverse near-term losses in Petrochemical and Chemical divisions. During the recent 1QFY13 results briefing, management highlighted one of the main reasons for the narrower YoY PBT losses in the Petrochemical and Chemical divisions, were the lower annual bunker costs. Whilst that is encouraging we believe that crude oil prices, and bunker costs could continue to hover on a flat trend, which will not entirely reverse losses for the two divisions in the near-term.

Forecasts. We have upgraded our FY14-15 USD/MYR exchange rates assumptions to RM3.09 and RM3.04 (from RM3.06 and RM2.91) respectively in-line with our 3QFY13 house exchange-rate assumptions. Overall, this marginally increases our FY14-15E forecasts by 1.1% and 4.8% to RM1.26b and RM1.53b respectively (from RM1.2b and RM1.47b). 

Revise target price upwards but downgrade call Underperform. Our target price for the stock is thus revised upwards to RM5.06 (from RM5.04/share) based on unchanged target CY14 P/BV of 1x. Given the limited 0.3% total return upside (downside to share price of -2.6% inclusive of dividend yield of 2.9%) from current share price, we are downgrading our call on the stock at this juncture.

Source: Kenanga