MISC posted a poorer set of 1Q18 results, owing to weaker petroleum shipping and offshore segments, coupled with losses from MHB. Moving forward, we see no signs of sustainable recovery in charter rates, but additional two LNG carriers joining the fleet by 1H18 should be earnings positive. In all, we maintain our MARKET PERFORM call with a lower target price of RM7.15.

Below expectations. The poorer 1Q18 core net profit (CNP), which plunged 52% YoY and 50% QoQ to RM311.7m, came in below expectations, accounting for only 15% of both our and consensus full- year estimates. The mismatch was mainly due to poorer-than-expected contributions from the petroleum shipping and offshore segments. However, announced NDPS of 7.0 sen was expected, similar to 1Q17.

Poorer overall results. YoY-wise, the poorer results were mainly due to: (i) losses from petroleum shipping segment, with 1Q18 losses before tax of USD18.4m vs. PBT of USD12.6m in 1Q17. These losses were caused by depressed charter rates during the quarter, resulting in the segment failing to break even as spot charters make up 45% of the segment’s portfolio, (ii) poorer offshore segment’s PBT of USD32.4m as opposed to USD73.2m, due to some favourable financial adjustments post-consolidation of GKL last year, and (iii) losses from MHB, with 1Q18 core net loss of RM25.2m as compared to breaking even at the core level in 1Q17.

Sequentially, the weaker QoQ results were mainly attributable by: (i) aforementioned losses from the petroleum shipping segment against the core PBT of USD5.6m in 4Q18, (ii) poorer offshore segment with PBT declining 61% QoQ due to lower contribution from FSO Benchamas 2 as the project is currently at its tail end, and (iii) losses in MHB as opposed to CNP of RM46.3m in 4Q17.

Additionally, we believe the strengthening of the Ringgit against the USD also played a part towards the overall poorer results as MISC’s main functioning currency is the USD. 1Q18 daily average MYR/USD exchange rate was RM3.92/USD as compared to RM4.45/USD and RM4.16/USD in 1Q17 and 4Q17, respectively.

No sustainable recovery in shipping rates. The petroleum shipping segment is expected to face a more challenging year in FY18, on the back of suppressed charter rates given the tonnage oversupply in the market. Similarly, LNG charter rates are also expected to face a weak year as a result of tonnage overcapacity, coupled with a number of long-term charters expiring in the market. Nonetheless, MISC is expecting two additional LNG carriers to join the fleet in 1H18, which should contribute positively to group earnings. Likewise, the group’s low net-gearing of 0.2x also makes it well-positioned for any opportunistic investments if there is any pickup in charter rates.

Maintain MARKET PERFORM, with a lowered TP of RM7.15. Post- results, we are introducing a new set of FY18-19E numbers, with CNP lowered by 18-13% to RM1.7-1.9b. Some changes include the lowering of: (i) our exchange rate assumption to RM4.00/USD, from RM4.20/USD, and (ii) our petroleum charter rate assumption. Following this, our TP is also lowered to RM7.15 (from RM7.20 previously), based on forward PBV of 0.9x on FY19E, which is close to -0.5 S.D. from its 5- year forward PBV mean.

Risks to our call include: (i) weaker-than-forecasted charter rates, (ii) stronger-than-expected MYR/USD exchange rates, (iii) lower-than- expected number of operating vessels, and (iv) slowdown of global economy.

Source: Kenanga Research - 15 May 2018