1Q16 earning came within expectations with interim DPS of 7.0 sen/share declared. While LNG charter rates are expected to stay flattish due to overcapacity, the company is expecting market recovery within the petroleum shipping space, earliest by 2H17 underpinned by improving crude demand and moderation of fleet growth. All in, we maintain our MARKET PERFORM call on the stock with higher target price of RM8.04/share post rollover of valuation base year to FY18.

Within expectations. 1Q17 core net profit of RM511.5m came within expectations at 26%/25% of our/consensus full-year estimates. First interim dividend of 7.0 sen/share was declared, which is within our expectation of full-year DPS of 20.0 sen/share.

Earnings up QoQ but down YoY. 1Q17 core net profit improved by 22% QoQ to RM511.5m from RM418.1m in 4Q16 after stripping several extraordinary items including one-off gain of RM377.4m arising from FPSO Cendor, construction work of Benchamas 2 and GKL’s adjudication, RM227.9m impairment loss on receivables and RM15.6m unrealised forex loss. The better performance was largely due to maiden earnings contribution from Seri Cenderawasih, additional deferred revenue recognised from Seri Balhaf and Seri Balqis. Despite lower charter rates and higher bunker costs, the petroleum segmental earnings improved by 79% QoQ due to better lightering activities and higher term to spot ratio. YoY-wise, revenue increased by 25% as a result of consolidation of GKL and several one-off gains as mentioned above. However, core earnings decreased by 21% from RM644.4m in 1Q16, mainly bogged down by weaker petroleum tanker rates and higher bunker costs coupled with absence of compensation fees received for early termination of Aman Bintulu and Aman Hakata offsetting maiden earnings from two Seri C Class LNG fleets.

Tanker rates still under pressure. MISC is looking for market recovery within the petroleum shipping space at earliest by 2H17 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 and charterers are seeking shorter contract term of 7-10 years instead of 15-20 years. Its 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 eight new tankers coupled with re-delivery of more expensive in-charters and older tonnages. Lastly, Its subsidiary, MHB’s near-term earnings outlook remains weak despite order-book doubling to RM2.1b post EPCIC of Bokor’s CPP contract win in view of limited job prospect within the fabrication space given tight capex spending from oil majors.

No changes to our FY17-18E earnings. With weaker petroleum charter rates and no improvement in LNG tanker rates in sight for the near term, we believe earnings will fall by 3% in FY17 but subsequently improve by 7% in FY18 factoring contribution from additional two new LNG vessels to be delivered by 2Q18.

Maintain MARKET PERFORM. While maintaining our current forecast, we decide to roll over our valuation base year to FY18. Hence, our TP is increased to RM8.04 from RM7.88, pegged to unchanged PBV multiple of 0.9x, which is -0.5SD to the 5-year mean as weak charter rates and oversupply in LNG shipping 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 worsethan-expected slowdown of the global economy

Source: Kenanga Research - 5 May 2017