Period

2Q15/1H15

Actual vs. Expectations

1H15 core net profit of RM1224.7m (+48.9%) was within our expectation, accounting for 51.9% of our forecast but beat consensus estimates (at 56.5%). We think the consensus might have underestimated the recovery in the petroleum segment.

Dividends

The Group has proposed a first interim DPS of 7.5sen (vs. 1H15: 4.0 sen), which was a positive surprise. The dividend translated into a pay-out ratio of 27.2%.

Key Results Highlights

YoY, 1H15 revenue grew by 5.4% to RM5.1b thanks to the improved freight rate in the petroleum segment (+24%). PBT surged by 47.2% to RM1.3b, contributed by the overwhelming performance in the petroleum segment on the back of stronger freight rates ranging from 35% to 58% (time charter) as well as the delivery of two Eagle Barents during the 1H15. PBT contribution from LNG segment declined by 18.5% due to lower revenue (-14.9%) as 2 Puteri Class vessels going out of charter. As a result, core net profit was able to jump 48.9% to RM1.2b, further aided by lower finance costs (-46%) and lower tax expenses (-85.9%).

QoQ, 2Q15 revenue recorded 4.4% growth to RM2.6b due to the additional contribution from one extra Eagle Barents DP shuttle tanker and favourable petroleum freight rates which lifted the revenue contribution by 4.9%. PBT registered a jump of 50.9% to RM772.6m as contributions from petroleum more than doubled due to the reasons mentioned above. Meanwhile, LNG segment also recorded growth of 14.3% mainly attributed to the longer operating days as compared to 1Q15 as well as on lower operating costs. As a result, net profit grew 50.5% to RM743.1m.

Outlook

We are encouraged by the sustained strong performance in the petroleum segment which was able to negate the weakness in LNG segment due to the charter expiry of vessels. The Group expects the strong petroleum freight rate to continue as oil production showed no signs of slowing down while the next new delivery of vessels is in another 2-3 years.

On the flipside, LNG rates are not expected to recover significantly in the near future in view of lacklustre demand on LNG and overcapacity of vessels with up to 40 vessels idling. However, with the charter renewal of 5 Puteri class carriers and 5 newbuild contracts, we think that the earnings growth momentum in LNG can be sustained.

We continue to like MISC with earnings forecasted to grow 20.1% and 11.5%, respectively over the next two financial years. The Group is also in a healthy balance sheet position with net gearing at 0.14x as of 2Q15 which provides further gearing room should any investment opportunities arise.

Change to Forecasts

We made housekeeping changes to our forecast as well as imputing the lower earnings contribution from MMHE after our analyst revised down the forecasts. As a result, FY15E net profit was trimmed by 1.2%. We also forecast higher dividend for both FY15E and FY16E by assuming higher pay-out ratios of c.20%.

Rating

Maintain OUTPERFORM

Valuation

Our Target Price is nudged slightly lower to RM9.26 (from RM9.35) after our FY16E BV is revised down post earnings forecast and dividend pay-out ratio adjustment. We continue to value MISC at 1.3x PBV FY16E, which is above its 5-year mean BV. Our TP implies 14.1x PER FY16E.

Risks

Lower-than-expected charter rates

Overcapacity in vessels.

Source: Kenanga Research - 5 Aug 2015