Period

3Q15/9M15

Actual vs. Expectations

9M15 core net profit of RM1.9b (+52.3%) beat expectations, accounting for 83.5% of our in-house forecast and 79.0% of the consensus’ estimates. Core net profit was mainly adjusted for net impairment losses amounting to RM232.3m arising from the revaluation of threePuteri class LNG vessels, which went out of charter in FY15. The positive deviation can be attributed to the better-than-expected performance in petroleum division.

Dividends

None, as expected.

Key Results Highlights

YoY, 9M15 revenue grew 8.4% to RM7.6b mainly attributable to the petroleum division (+28.1%) on the back of sustained momentum of strong charter rates. PBT surged 26.5% again due to the solid performance of petroleum division, which returned to profit from a loss-making position in 9M14 thanks to the reversal in charter rates. The LNG division saw weaker revenue and PBT contribution by 17.7% and 25.3%, respectively as three Puteri Class carriers’ contracts expired in FY15. Core net profit increased by 52.3% to RM1.9b, further aided by lower effective tax rate of 1.2% (9M14:3.9%).

QoQ, 3Q15 revenue fell marginally by 3.6% to RM2.5b mainly due to the LNG division (5.9%) as another Puteri Class carrier went out of charter while the heavy engineering division also recorded lower revenue (-62.6%). PBT declined by 10.9%, in line with the fall in revenue but the main drag was LNG division (-20.2%) due to the lesser number of vessels in service and also lower margin (-8.9ppt) as the Puteri Class vessel mentioned above was previously providing superior margins to the Group.

Outlook

Moving forward, the Group is anticipating stronger 4Q15 numbers as charter rates in petroleum expected to rebound from the short-term weakness in 3Q15 due to seasonality and the continuous slow fleet growth. Besides, two of the Puteri Class LNG carriers that were out of contracts have been refurbished and delivered to client in 4Q15; thus, the LNG division is expected to pick up as well.

Management remains confident of the strong charter rates in petroleum division for the next 1-2 years in view of the limited fleet growth and lower demolition activities that indicate buoyant demand. 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 54 vessels idling. However, with the charter renewal of five Puteri class carriers and five newbuild contracts, we think that the earnings growth momentum in LNG can be sustained. The first two new LNG vessels are expected to be delivered in 2H16 and we expect the new delivery to drive the earnings growth in FY16.

Recent announcement of expansion in petroleum fleet will allow the Group to capitalise on the positive petroleum charter market while we are also positive on the disposal of VTTI, expected to be completed in 4Q15, to pave the way for MISC to focus on its core business.

Change to Forecasts

We upgraded our FY15-16E net profits by 12.7-15.6% after assuming higher charter rates for the petroleum division as well as revising the MYR/USD exchange rates to be in line with our economists’ forecast (FY15E: RM4.00, FY16E: RM4.20).

Rating

Maintain OUTPERFORM

Valuation

Correspondingly, with the upward revision in earnings, our Target Price is nudged higher to RM10.64 (from RM9.26), based on 1.25x PBV FY16E. The valuation is unchanged at +0.5SD over the 5-year mean PBV of 1.1x.

Risks to Our Call

Lower-than-expected charter rates

Overcapacity in vessels.

Source: Kenanga Research - 5 Nov 2015