Period  2Q14/1H14

Actual vs. Expectations MISC chalked in a core net profit of RM336.0m in 2Q14, bringing its cumulative core 1H14 net profit to RM822.4m. This came in within our and consensus expectations by accounting for 48.5% and 48.0% of respective full-year forecasts.

Dividends  It has announced its first tax-exempt interim dividend of 4.0 sen/share, which accounted for 97.6% of our full-year dividend forecast 4.1 sen/share.

Key Result Highlights In 2Q14, core net profit rose 6.6% YoY attributable to: (i) higher earning days in LNG shipping and (ii) improved petroleum tanker freight rates despite the increase being partially negated by additional costs incurred for certain projects in Heavy Engineering.

 Sequentially, core earnings slumped 30.9% in 2Q14 compared to 1Q14 predominantly due to operating loss incurred in the petroleum tanker segment from a drop in freight rates. This is despite the group registering 10.8% growth in top line QoQ on higher revenue from Heavy Engineering on higher project billing.

 In 1H14, core net profit grew 33.6% YoY underpinned by: (i) higher earning days in LNG shipping, (ii) improved freight rates in Petroleum shipping coupled with lower cost base from a smaller fleet of operating vessels, and (iii) contribution of Gemusut-Kakap FPS.

Outlook  Overall petroleum segment has improved on YoY basis, but we still expect the segment to be in the red in FY14. Losses are likely to narrow as more vessel disposals reduce its cost base.

 Chemical tanker segment is expected to be fairly stable in 2014.

 With the successful listing of VTTI Energy Partners LP, MISC is expected to own an effective 32.0% stake in the listed entity and the group is poised to record a gain upon listing which we have not factored into our forecast pending more clarification post blackout period.

 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 have trimmed our earnings forecast for FY14 and FY15 by 4.0% and 2.0%, respectively, following the downward revision of MHB (UP, TP: RM), the engineering subsidiary of the group, to account for slower profit recognition of its material projects.

Rating Upgraded to OUTPERFORM

Valuation  Our PBV-derived TP is revised up to RM7.49 from RM6.87 previously as we have rolled over our valuation to FY15 based on 1.2x PBV.

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

 Escalation of bunker cost.

Source: Kenanga