1H17 earning came within expectations with a second interim DPS of 7.0 sen/share. Earnings prospect remains lukewarm as both LNG and petroleum charter rates are still under pressure in the near term. All in, we maintain our MARKET PERFORM call on the stock with a lower target price of RM7.25/share pegged to 0.8x FY18E PBV.

Within expectations. 1H17 core net profit of RM1.04b came within expectations at 54%/50% of our/consensus full-year estimates. Second interim dividend of 7.0 sen/share (vs. 10.0 sen/share in 2Q16) was declared, bringing its YTD DPS to 14sen, which is within our expectation of full-year DPS of 20.0 sen.

Earnings up both QoQ and YoY. Despite revenue falling by 23% QoQ, MISC’s 2Q17 core net profit improved by 4% QoQ to RM532.5m from RM511.5m in 1Q17 after stripping several extraordinary items, including a one-off gain of RM133.6m impairment loss on LNG vessel, Tenaga Lima, unrealised forex loss of RM17.9m, PPE write-off of RM16.3m, early termination fees of Tenaga Lima of RM145.9m. The better set of results was largely due to: (i) stronger LNG segment helped by additional earnings days of one LNG vessel, which experienced technical repair in 1Q17 offsetting charter income loss from Tenaga Lima, which was terminated in early April, and (ii) lower depreciation. Meanwhile, the Petroleum segment slipped into losses of USD10m from USD12.5m profit in 1Q17, marred by lower charter rates masking lower charter hire costs due to redelivery of vessels and lower bunker costs. YoY wise, core earnings inched up by 3% from RM519.0m in 2Q16, thanks to: (i) higher earnings from LNG segment underpinned by full contribution from Seri Camellia and Seri Cenderawasih, additional deferred revenue recognised from Seri Balhaf and Seri Balqis, and (ii) strengthening of USD against MYR masking weaker offshore earnings dragged by early termination of contracts for two MOPU and an FSO despite full consolidation of GKL and additional construction gain from Benchamas 2 and commencement of MaMPU.

However, cumulatively, 1H17 core earnings fell by 10% from RM1.16b mainly bogged down by weaker petroleum tanker rates and higher bunker costs coupled with the absence of compensation fees received for early termination of Aman Bintulu and Aman Hakata offsetting maiden earnings from two Seri C Class LNG fleets.

No changes to our FY17-18E earnings. With weaker petroleum charter rates and no improvement in LNG tanker rates in 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 forecasts, our TP is reduced to RM7.25 from RM8.04, pegged to lower PBV multiple of 0.8x (from 0.9x previously), which is -1.0SD to the 5- year mean as we reckon the recovery of charter rates is likely to prolong in view of the oversupply in the LNG shipping sector. 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-thanexpected slowdown of the global economy.

Source: Kenanga Research - 10 Aug 2017