MISC’s FY16 earning came within our expectations but fell below consensus full-year estimates by 7%. The company is looking for market recovery within petroleum shipping space post 2017 backed by sustainable demand and moderation of fleet growth while LNG charter rates are still under pressure due to overcapacity. Cut FY17E earnings by 12% but maintain MARKET PERFORM call with a lower target price of RM7.88/share. FY16 within our expectations. FY16 core net profit of RM2.0b came within our expectation at 97% of estimate but fell below consensus expectations by 7%, possibly dragged by unexpected losses in MHB and weaker-than-expected petroleum charter rates. Second interim dividend of 20.0 sen/share was declared, bringing its full-year DPS to 30.0 sen, which was above our expectation of 20.0 sen/share.

Earnings up QoQ but down YoY. MISC’s 4Q16 core net profit improved 43% QoQ to RM493.9m from RM344.9m in 3Q16 mainly attributable to higher revenue in petroleum tanker charter rates but was offset by weaker performance from MHB and LNG segments. Note that the petroleum segment climbed into profit of USD7.0m from a loss of USD27.7m in 3Q16 due to higher charter rates and lower charter hire expense. YoY-wise, earnings also plunged 57% from RM1.14b in 4Q15, in tandem with 24% drop in top-line. This was largely bogged down by all the core segments as a result of weaker rates for both LNG and Petroleum segments and lack of contract replenishment for MHB. Cumulatively, FY16 earnings also fell 37% YoY from RM3.1b in FY15, 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 persists. MISC is looking for market recovery within petroleum shipping space post 2017 backed by sustainable demand and moderation of fleet growth. Meanwhile, 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 last year. The 3rd Seri C Class LNG new-build will be delivered in 2H17 and fleet rejuvenation plan (for petroleum and chemical segments) remains on track with delivery of 8 new tankers coupled with re-delivery of more expensive in-charters and older tonnages. Lastly, MHB is likely to face order book replenishment risk in view of weak fabrication market.

Trimmed FY17E earnings by 12% to RM1.9b after accounting for: (i) weaker average petroleum charter rates, (ii) lower revenue and profit margin from MHB. Meanwhile, FY18E earnings of RM2.1b, implying earnings growth of 6.6% is introduced assuming: (i) foreign exchange of RM4.4/USD, 10% growth in average petroleum charter rates, and (ii) delivery of 2 LNG new-builds in 2018.

Maintain MARKET PERFORM post earnings cut with lower TP of RM7.88 from RM7.97, pegging to lower FY17 PBV multiple of 0.9x (from 0.94x), which is -0.5SD to the 5-year mean as low charter rates and oversupply in the sector is expected to persist. Having said that, MISC’s balance sheet remains healthy with net gearing of 0.2x, allowing it to seek opportunistic brown field replacement projects and shallow-water assets requirement in the region.

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

Source: Kenanga Research - 13 Feb 2017