1Q16 core earnings of USD195m/RM644m missed our expectation marginally (19.4%) but were within market consensus (22.5%). No dividends as expected. All in, our earnings estimates are trimmed by 12-11% for FY16-17E to RM2.9-3.2b after accounting for weaker petroleum and LNG segment, and the remaining 50% acquisition of GKL and Paramount by May-16. Lower TP of RM9.64 (from RM10.64) while our OUTPERFORM call is maintained.

1Q16 slightly below. 1Q16 core net profit of USD195m/RM644m (+30.6%) came in slightly below expectations at 19.4% while topline only made up 20% of our estimate, while our bottomline was further dragged down by higher portion of non-controlling interest.

Result highlights. MISC’s topline was weaker both YoY (-17.0%) and QoQ (-27.0%) mainly due to weaker heavy engineering segment as projects were nearing completion. Core PBT was also down QoQ (-27.3%) to USD191.7m due to similar reasons mentioned above, coupled with recognition of gain on disposal of a JV in 4Q15, and higher depreciation expense from change in estimated useful life of ships. The only upside was stronger Core PBT (+25% YoY) to USD153.3m due to higher compensation from two Time Charters and early termination in LNG business. MISC’s balance sheet remains healthy at 0.01x. Outlook. MISC expects to complete its acquisition of the remaining 50% stake in Gumusut-Kakap, and 50% equity stake in Paramount tankers by end May-16, which we have now imputed in our estimates. The group expects LNG and Petroleum segment to be softer going forward as rates are coming under pressure due to overcapacity.

We decrease our FY16-17E earnings by 12-11% to RM2.9-3.2b after accounting for the net negative effect of the following; (i) 50% stake in Gumusut-Kakap and Paramount tankers, but this was offset after accounting for (ii) weaker petroleum and LNG segment as freight rates are coming under pressure due to the end of winter and as new vessels delivery enters the market with supply expected to outweigh demand.

Lower TP to RM9.64 but maintains OUTPERFORM. Our TP is lowered to RM9.64 (from RM10.64) based on a lower FY16E BVPS of RM8.38 (from RM8.49) after lowering our earnings estimates, and on a lower FY16E PBV multiple of 1.15x (from 1.25x @ +1SD) , which is on par with +0.5SD over the 5-year mean post the weaker LNG and Petroleum segments. Even after lowering our earnings estimates and TP, MISC still warrants a convincing OURPERFORM call and is commanding close to 18% total returns at current levels. Additionally, we believe MISC deserves to trade above its mean standard deviation as we favour MISC’s strong balance sheet as it is able to pounce on any opportunity to acquire value accretive distressed assets, particularly in the oil and gas sector. Recently, news surfaced that MISC is in talks to acquire TH Heavy Engineering, while similar news surfaced in Nov-15 of MISC acquiring a significant stake in Bumi Armada should MISC inject its offshore assets into Armada in return for shares. Although the news has been disputed by management, MISC does concur that they are interested in acquiring FPSOs or petroleum tankers. Risks to our call include: lower-thanexpected charter rates and worse-than-expected slowdown of the global economy. 

Source: Kenanga Research - 9 May 2016