FY17 earnings came within expectations. The company is looking for market recovery within the petroleum shipping space by 2H18 backed by sustainable demand and moderation of fleet growth while LNG charter rates are still under pressure due to overcapacity. All in, we maintain our MARKET PERFORM call with a lower TP of RM7.20/share pegged to 0.8x FY18E PBV.

FY17 within our expectations. FY17 core net profit of RM2.1b came within expectations at 102%/96% of our/consensus estimates. Fourth interim dividend of 9.0 sen/share was declared, bringing its full-year DPS to 30.0 sen (similar to FY16), which was above our expectation of 28.0 sen/share.

Earnings up both QoQ and YoY. MISC booked in core net profit (CNP) of RM587.2m after stripping off: (i) RM553.9m impairment on 5 LNG vessels, 7 chemical tankers, and (ii) RM33.3m net write-back on receivables. This marked an 24% QoQ improvement due to better contribution from: (i) petroleum segment (RM5.6m profit vs. RM18.7m losses in 3Q17) as a result of higher fleet size and improved charter rates, and (ii) better heavy engineering segment (+3.8x), masking weaker LNG segment (-37%) and offshore segment (-43%). YoY, core earnings increased by 40%, thanks to higher earnings from offshore segment (RM43.4m profit vs. RM15.3m losses in 4Q16) helped by higher construction profit recognition for FSO Benchamas and stronger heavy engineering segment (+4.1x) resulting from higher variation order recognition. Cumulatively, FY17 CNP increased by 10% to RM2.1b, mainly helped by higher contribution from three Seri C Class LNG carriers delivered last year, additional deferred revenue recognised from Seri Balhaf and Seri Balqis as well as stronger offshore segment led by higher FSO Benchamas construction profit recognition. This offset weaker petroleum tanker rates coupled with the absence of compensation fees received for early termination of Aman Bintulu and Aman Hakata.

Potential rate improvement in 2H18? Weakness in petroleum tanker charter rates is likely to prolong till 2H18 with the anticipation of lower newbuild delivery. With the delivery of its 3rd Seri C Class LNG newbuild, Seri Cempaka on 27 July 2017, the remaining two vessels are on track for delivery by March and May this year, respectively. The current portfolio mix for petroleum and chemical vessels has improved to 54:46 term to spot from 47:53 last quarter. Meanwhile, MISC will take delivery of two Suezmaxes and two Aframaxes in 1Q18, which is in line with its fleet rejuvenation strategy. Lastly, the company is eyeing to secure smaller offshore jobs within this region by 1H18.

No changes to our FY18E earnings while FY19E earnings of RM2.2b, implying earnings growth of 3.3% is introduced assuming: (i) foreign exchange of RM4.2/USD and 5% growth in average petroleum charter rates.

Maintain MARKET PERFORM. With no changes in our earnings, our TP is adjusted lower to RM7.20 (from RM7.25 previously) pegged to unchanged PBV multiple of 0.8x, which is -1.0SD to the 5-year mean following the update of FY17 actual book value. 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 - 14 Feb 2018