Period  1Q14

Actual vs. Expectations The 1Q14 results were within expectations with core net profit of RM486.4 making up 29.0% of our FY14 full-year estimates and 28.7% of market consensus.

Dividends  No dividend was declared in the quarter.

Key Result Highlights 1Q14 core net profit slid 3.3% QoQ, despite a 6.9% improvement in revenue, mainly due to tax differentials where MISC enjoyed a tax incentive in 4Q13 while tax expenses were incurred in 1Q14.

 However, 1Q14 net profit surged sharply by 61.9% YoY, despite a 3.7% decline in revenue. This was driven by (i) higher revenue from LNG segment on the back of higher earning days, (ii) more favourable freight rates for Petroleum segments coupled with lower operating cost due to smaller fleet size, (iii) lease income contribution from Gemusut Kakap FPS, which commenced operations in June 2014, and (iv) absence of impairment provision whereby in 1Q13 the group incurred impairment provision RM22.3m.

 We believe the revenue was dragged down by the drop in Offshore segment revenue (-31.4% YoY), mainly from lower revenue in Heavy Engineering division, MHB (UP; TP: RM3.60), with projects in hand nearing completion as well as low value of outstanding progress billings.

Outlook  Overall, Petroleum segment has improved with the division returning to the black in 1Q14 but rates have retraced significantly recently and we expect the segment to be in the red again in the coming quarters. However, we believe losses will narrow on YoY basis.

 Chemical tanker segment is expected to be fairly stable in 2014, but we expect to see more vessel disposals in the coming years given the management’s plan to rationalise their fleet.

 With 5 Puteri class LNG vessels going out of charter in the next 3 years and significantly higher vessel deliveries expected in 2014, we expect the LNG segment to be lacklustre as rates are coming under pressure.

Change to Forecasts We maintain our forecasts and assumptions for now.

Rating Upgraded to MARKET PERFORM following the price weakness in the past three months.

Valuation  Our PBV-derived TP is maintained at RM6.87, pegged at 1.2x to FY14 BVPS.

Risks to our Call Lower-than-expected tanker charter rates.

 Escalation of bunker cost.

Source: Kenanga