Period  3Q14/9M14

Actual vs. Expectations MISC posted a core net profit of RM457.3m, bringing its 9M14 cumulative earnings to RM1,279.7m, which is within expectations as it accounted for 77.5% and 73.0% of ours and consensus FY14 full-year estimates.

Dividends  No dividend was declared for the quarter.

Key Result Highlights In 3Q14, core net profit rose 16.0% YoY to RM457.3m on the back of: (i) higher earning days and lower dry docking days in the LNG division, (ii) significantly lower losses in Petroleum tanker division backed by improvement in freight rates and increased Aframax lightering activities albeit being slightly offset by weaker Heavy Engineering division as existing projects were nearing completion and lower earnings from Chemical tanker division on lower earning days.

 Sequentially, 3Q14 core earnings also improved 14.9% QoQ due to: (i) lower losses from Chemical tanker division, (ii) higher LNG earnings contribution on higher earning days, and (iii) stronger performance of the Offshore division.

 In 9M14, its cumulative core net profit gained 30.5% YoY to RM1,279.7m due to stronger margins from: (i) both Petroleum and Chemical tanker segment on higher freight rates achieved YoY and (ii) higher LNG earning days. This is, however, being partially negated by lower Heavy Engineering earnings contribution.

Outlook  Overall petroleum segment has improved on YoY basis but we still expect the segment to be in the red in FY14. Demand for Petroleum tanker charter will be backed by stocking-up activities by China on weaker crude oil prices.

 Chemical tanker segment’s recovery is expected to be flattish with eastbound Transatlantic trade remaining slow.

 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.

 On top of that, there is a marginal concern on the demand side of LNG as the Nuclear Regulatory Authority of Japan has announced the restarting of two nuclear plants to reduce its dependence on LNG as the energy source.

Change to Forecasts We are maintaining our earnings forecasts for now.

Rating Downgraded to UNDERPERFORM due to its recent price run up and as per our rating definitions.

Valuation  Our PBV-derived TP is maintained at RM7.49

Risks to Our Call   Better-than-expected tanker charter rates.

 Lower bunker cost.

Source: Kenanga