Despite 9M16 results coming below expectations due to weaker charter rates, we expect 4Q16 earnings to pick up on higher rates seasonally during the winter season. Our FY16-17E earnings estimates are slashed by 18-17% after trimming down average tanker rates after this weaker set of results. We downgraded to MARKET TPERFORM post earnings cut with a lower target price of RM7.97/share.

9M16 below expectations. 9M16 core net profit of RM1.5b came in below our and consensus expectations at 60% and 63% of FY16 estimates, respectively. This was mainly due to top line only making up 65% of our estimate dragged by weaker-than-expected crude and product tanker rates as well as lower earnings from MHB. No dividend was declared as expected.

Disappointing quarter. MISC’s 3Q16 core net profit dropped 31% QoQ to RM344.9m from RM500.5m in 2Q16, dragged by weaker core segments (LNG and Petroleum) but was offset by stronger offshore contribution underpinned by consolidation of GKP after stripping off c.RM78m reversal of construction gain for FPSO Cendor. Note that the petroleum segment fell into losses of USD27.7m from a profit of USD14.7m in 2Q16 due to lower charter rates and higher bunker and port cost. YoY-wise, earnings also plunged 52% from RM715m in 3Q15, bogged down by the weaker LNG segment (in the absence of two LNG vessels, Aman Bintulu and Aman Hakata, which were terminated early of the year and Seri Zamrud which was off hire since July this year) and lower petroleum charter rate. Cumulatively, 9M16 earnings fell 25% YoY from RM1.9b in the corresponding period a year ago, no thanks to weaker performance from all core segments led by less working days for LNG vessels, lower crude and tankers rates, completion of major projects such as Malikai and SK316 projects for MHB as well as higher depreciation due to change in vessels estimated useful lives.

Challenging outlook. MISC expects the petroleum segment to pick up in 4Q16 during the winter season while LNG charter rates are still under pressure due to overcapacity, which is likely to last until 2018. The company is still looking for redeployment opportunities for the two LNG vessels (Aman Bintulu and Aman Hakata) which were terminated early of the year. Meanwhile, MHB is likely to face order book replenishment risk in view of weak fabrication market.

Cut FY16-17E earnings by 18-17% to RM2.0-2.2b after accounting for: (i) weaker average petroleum charter rates, (ii) lower revenue and profit margin from MHB, and (iii) higher depreciation charges.

Downgrade to MARKET PERFORM post earnings cut with lower TP of RM7.97 from RM8.19. We lower our FY17E BVPS to RM8.48 from RM8.68 in line with lowered earnings, and peg to FY17 PBV multiple of 0.94x, which is close to -0.5SD below 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. Having said that, MISC’s healthy balance sheet with net gearing of 0.18x allows 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 worsethan-expected slowdown of the global economy.

Source: Kenanga Research - 3 Nov 2016