Period     2Q13/1H13

Actual vs. Expectations   MISC recorded 2Q13 core net profit of RM259.4m which brought 1H13 net profit to RM587.2m, within our expectation at 46.7% of our full-year forecasts (RM1.24b) but slightly below market’s expectation at 44.4% of the consensus full-year profit (RM1.32b). 

Our core net profit forecast excludes the net impairment reversals and net loss on ship disposals amounting to RM33.6m.

Dividends    No dividend was declared for the quarter. 

Key Results Highlights    QoQ, the 2Q13 core net profit was down by 20.9% largely due to higher losses in both the Petroleum and Chemical divisions. The Petroleum division was affected by lower earnings days as some vessels were left idle pending sales exacerbated by additional cost of early vessel redelivery while the Chemical division saw a higher number of vessels undergoing  drydocking exercises. 

  YoY, the 2Q13 core net profit was down by 11.7%, mainly due to higher effective tax in the current year. However, looking at the overall performance on EBIT level, operational  loss was lower as the chemical division narrowed its losses.  

Outlook    LNG division: Management mentioned that they were disappointed by Petronas’ decision to go ahead with direct procurement of LNG vessels for its new projects. Given the structural change, MISC will turn more aggressive in future third party bids where in the past they had historically prioritised Petronas’ requirements over other bids. Projects highlighted were from Papua New Guinea, Nigeria and Australia. Charter rates seem to be softening on the back of newbuildings entering the market. 

Petroleum and Chemical divisions: MISC looks to continue rationalising these segments’ fleets as the market  conditions continue to be difficult. Although MISC felt optimistic for the Chemical business earlier in 1Q13, they have now turned cautious given the softening Chinese demand which has caused spot rates heading for a downtrend. A convincing recovery for the Chemical division is expected only in FY15 (versus earlier expectations of a recovery in FY14).

The Offshore division could see some earnings growth in 2H13 with the commencement of contributions from the GumusutKakap project.

The Heavy Engineering division continues to struggle amidst dwindling contract replenishment, which remains a concern. 

Overall, MISC’s tone is cautious and hopes to be able to sustain its earnings.

Change to Forecasts  We have increased our FY13-14 forecasts by 2.5% and 1.0% as we fine-tuned our: (i) USD exchange rate higher to RM3.17 and RM3.09 (from RM3.09 and RM3.04 previously) in line with our in-house economist’s forex forecasts for the strengthening USD and (ii) FY13-14 interest income (for lower cash post assuming more borrowings).

Rating  Maintain UNDERPERFORM

Valuation     We maintain our target price of RM5.06 based on 1.0x FY14 P/B.

We note that the historical average forward P/B for the stock is around 1.16x. However, we concur with the management’s cautious outlook and stay conservative for now.

Risks    (i) Lower than expected charter rates; and (ii) higher-thanexpected bunker costs.

Source: Kenanga