9M17 earnings came above our expectations on the back lower depreciation and operating cost. While weakness in petroleum segment likely to persist, lifting the odds of asset impairment in 4Q17, management is still actively pursuing offshore projects leveraging on its strong balance sheet. All in, despite earnings upgrade, we maintain our MARKET PERFORM call on the stock with unchanged TP of RM7.25/share underpinned by decent dividend yield of 4%.

Above our expectations. At 79%/71% of our/consensus full-year estimates, 9M17 core net profit of RM1.5b came within consensus expectations but above our expectations due to stronger-than-expected contribution from LNG segment helped by lower depreciation and lower operating cost. Third interim dividend of 7.0 sen/share (vs. nil in 3Q16) was declared, bringing its YTD DPS to 21.0 sen, which also exceeded our full year DPS forecast of 20.0 sen.

3Q17 earnings down QoQ but up YoY. Despite revenue inching up by 1% QoQ, 3Q17 core net profit decreased by 11% QoQ to RM473.1m after stripping several one-off items, including reversal of doubtful debt and one-off gain following favourable Gumusut’s second adjudication outcome totalling USD18m, USD10m one-off reimbursement from FSU Lekas and USD10m disposal gain of CTSB. The poorer performance was caused by widening losses (+87%) from Petroleum segment marred by seasonally weaker charter rates off-setting maiden earnings post-delivery of two VLCCs and two LR2 petroleum tankers as well as third Seri C Class LNG carrier, Seri Cempaka in July. YoY, core earnings increased by 45%, thanks to higher earnings from LNG segment underpinned by contribution from three Seri C Class LNG carriers delivered this year and additional deferred revenue recognised from Seri Balhaf and Seri Balqis. Cumulatively, 9M17 CNP inched up by 2% to RM1.5b mainly helped by the above-mentioned reasons masking weaker petroleum tanker rates, higher bunker costs coupled with the absence of compensation fees received for early termination of Aman Bintulu and Aman Hakata.

Potential impairment in 4Q17. Weakness in petroleum tanker charter rates is likely to prolong till 2018 despite increased demolition activities to remove old tonnage. Consequently, continuous deterioration in asset value lifts the odds of asset impairment in 4Q17. With the delivery of its 3rd Seri C Class LNG new-build, Seri Cempaka on 27 July 2017, the remaining two vessels are on track for delivery in 1H18. Following expiry of contracts, the current portfolio mix for petroleum and chemical vessels has dropped to 47:53 term to spot from 49:51 last quarter. Lastly, we expect the heavy engineering segment to stay in the red for this year in view of depleting order-book and limited job prospect within the fabrication space given tight capex spending from oil majors.

Upgrade our FY17-18E earnings by 7-5% accounting for lower depreciation due to reclassification of Tenaga Lima due into asset held for sale and lower operating cost for LNG vessels.

Maintain MARKET PERFORM. Despite upgrading our earnings forecasts, our TP is maintained at RM7.25 pegged to unchanged PBV multiple of 0.8x, which is -1.0SD to the 5-year mean following our upgrade in DPS to 28.0 sen from 20.0 sen. While we reckon the recovery of charter rates is likely to prolong in view of the oversupply in the LNG shipping sector, 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 include: lower-than-expected charter rates and worse-than-expected slowdown of the global economy.

Source: Kenanga Research - 6 Nov 2017