Period  3Q13/9M13

Actual vs. Expectations MISC recorded 3Q13 core net profit of RM396.9m which brought 9M13 net profit to RM987.9m; within our (RM1.29b) and consensus (RM1.24b) full-year expectations at 76.6% and 79.7%, respectively.

 Our core net profit forecast excludes the net impairment reversals and net loss on ship disposals amounting to RM5.3m.

Dividends  No dividend was declared for the quarter.

Key Results Highlights QoQ, the 3Q13 core net profit was 53.0% higher due to the higher share of profit recognition of finance lease income from the Gemusut-Kakap Floating Production System (FPS). On top of that, operating profit also improved 53.9% QoQ due to lower operating costs on account of smaller fleet of vessels for Petroleum and Chemical segment in particular. It is also important to note that in 2Q13, provision for higher-than expected cost for a conversion project in Heavy Engineering business was included thus resulting in a lower earnings base in 2Q13. the 3Q13 core net profit was up by 84.6%, mainly due to profit contribution from Gemusut-Kakap FPS. In addition, stronger freight rates in the Chemical segment also contributed to the improvement of profitability.

Outlook  LNG division: Most of the existing fleet is still tied to long-term contracts. However, things appear to be more uncertain in 2014 as one of the LNG vessels is due for a contract expiry; and will be exposed to charter and extension risks.

 Petroleum and Chemical divisions: Management indicated that they will continue to downsize these two loss-making divisions and divert their focus to other segments. However, in the petroleum segment, rates seem to have found its bottom and management expects the rates to stabilise in the medium term. Improvements could be seen in the Chemical division with lower bunker costs and improvement in freight rates YoY. However, rates need to improve substantially more before this segment could return to the black. As whole, the oversupply situation in the tanker market still persists and themanagement does not expect a turnaround anytime before 2015.

 Offshore division: The division could see another lift in earnings in 2014 when the FPSO Cendor comes on stream. However, we have yet to factor in its earning contribution pending more clarification from the management regarding the revenue recognition method under the finance lease arrangement.

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

 Overall, MISC’s tone seems cautious and it is targeting to sustain its earnings.

Change to Forecasts We maintain our FY13-FY14 net profit estimates for now; given that results are in-line with our full-year forecasts.

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 to Our Call  (i) Higher-than-expected charter rates; and (ii) higher-thanexpected margins from divisions.

Source: Kenanga