1H16 core earnings of USD117.6/RM500.5m missed our and consensus’ expectations by 39% and 44%, respectively. First interim dividend of 10.0 sen was within expectations (50%). All in, our earnings estimates are trimmed by 15-16% for FY16-17E to RM2.5-2.7b after accounting for weaker petroleum and LNG segment. We maintain our OUTPERFORM call but lower TP to RM8.19 (from RM9.16).

1H16 below our expectations at 39%. 1H16 core net profit of USD117.6m or RM500.5m came in below our and consensus expectations at 39% and 44%, respectively. This was mainly due to top line only making up 42% of our estimate as we were more optimistic on the LNG and petroleum outlook which continued to trend lower in 2Q16, while bottom line was further dragged down by lower core margins from weakness in those segments and lower contributions from joint venture segment. MISC announced a first interim dividend of 10.0 sen which was within our expectations, and could have been attributable to the gain on disposal from GKL.

Result highlights. QoQ, MISC top line improved slightly (+4.5%), lifted by the Offshore segment from the consolidation of GKL, and Heavy Engineering due to commencement of new projects, and despite a slight drop in its core segments (i.e. LNG and Petroleum). However, core PBT was down by 36.2% due to: (i) weaker LNG segment (-61%) from early termination fees recognised in 1Q16, (ii) Petroleum segment (-67%) from lower earnings rates and days, while slightly higher taxes dragged down core net profit by 39.8%. MISC’s top line was weaker YoY (-16.5%) while core PBT was also down (-13.8%) due to Offshore and Heavy Engineering segment and after stripping out non-recurring items such as gain on disposal of GKL, intangible asset from customer contracts (USD13m) and loss on acquisition of Paramount (USD1.3m). Although the LNG and Petroleum segment were up YoY-Ytd, do note that this was mainly due to a stronger 1Q16 as contributions from both these segments are lower QoQ and YoY. MISC’s balance sheet remains healthy with gearing at 0.18x.

Outlook. The group expects LNG and Petroleum segment to be softer in coming quarters as rates are coming under pressure due to overcapacity, which is likely to last until 2018, while seasonality suggests that charter rates may pick up during the winter season in 4Q. On a positive note, management is still eyeing value accretive distressed brownfield assets while the risk of contract terminations are expected to decrease going forward, which should provide some earnings stability.

We decrease our FY16-17E earnings by 15-16% to RM2.5-2.7b after accounting for weaker petroleum and LNG charter rates, which are closer to current levels 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.

Maintain OUTPERFORM but lower TP to RM8.19 (from RM9.16). We lower our FY17E BVPS to RM8.68 (from RM8.89) in line with lowered earnings, and lower our applied PBV multiple to 0.94x which is close to - 0.5SD below the 5-year mean (from 1.03x which was on par with the 5- year mean) as low charter rates and oversupply in the sector continue to weigh down on sentiment, and we do not discount the possibility of impairments going forward. We continue to like MISC for its healthy balance sheet allowing it to acquire value accretive distressed brownfield assets should such opportunities arise in the market.

Risks to our call: lower-than-expected charter rates and worse-thanexpected slowdown of the global economy.

Source: Kenanga Research - 5 Aug 2016