Period

4Q15/FY15 Actual vs. Expectation

FY15 core net profit of USD809m/RM3.1b (+58.8%) was above expectations, matching 117.4% of our in-house forecast and 122.8% of the consensus’ estimates. The positive deviation can be attributed to the better-than-expected charter rates in the petroleum division.

Core net profit was adjusted for net impairment losses and disposal loss totalling USD188m. Among the major items being written down includes: (1) LNG vessels (c. USD 60m), (2) assets of MHB (c.USD38m), and (3) chemical tankers (c.USD15m).

Dividends

The Group declared a second interim and a final interim DPS of 12.5 sen and 10.0 sen respectively, bringing FY15 DPS to 30.0 sen, representing pay-out ratio of 43.4%. We were initially expecting DPS of 10 sen in FY15. The higher-than-expected DPS could be attributable to the disposal of 50%-owned VTTI B.V. (VTTI) for USD830m in August 2015. Key

Results

Highlights

YoY, FY15 revenue declined marginally by 2% to USD2.8b due to the lower contributions from LNG and heavy engineering divisions. Core PBT surged 48% to USD817m owing to the gallant performance in petroleum division thanks to the strong charter rates (up by 25% to 84%) which bumped PBT contribution up to USD136m from LBT of USD24m in FY14 but contribution from LNG division shrunk by 11% to USD432m due to the fewer operating vessels as their charter expired.

QoQ, 4Q15 revenue surged 28% to USD668m driven by recognition of construction revenue (c.USD 60m) for a finance lease asset under construction in offshore business and higher revenue from ongoing projects in heavy engineering. Core PBT jumped 40% to USD264m mainly due to the compensation for premature contract termination for two of its LNG vessels amounting to USD56m and the higher contribution from heavy engineering.

Outlook

Management remains optimistic of the sustainability of strong charter rates in petroleum division in view of the stable oil production, 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.

However, with the charter renewal of five Puteri class carriers and five new-build 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 earnings growth in FY16.

Change to Forecasts

We upgrade FY16E net profit by 13% after imputing stronger petroleum charter rates. We introduce FY17E earnings with net profit growth of 7%. We also raised our DPS to 20 sen for both FY16E and FY17E after assuming higher pay-out ratio of c.25% from c.13%.

Rating

Maintain OUTPERFORM

Valuation

Our Target Price is maintained at RM10.64 after earnings upgrade and tweak in dividend pay-out ratio assumption. Our TP is based on unchanged 1.25x PBV FY16E, on par with its +1SD over the 5- year’s mean PBV. We believe the valuation is justified by its sustainable earnings growth and healthy balance sheet position (net gearing at 0.02x as of FY15).

Risks to Our Call

Lower-than-expected charter rate

Overcapacity in vessels.

Source: Kenanga Research - 10 Feb 2016