We returned from a briefing recently with some earnings clarity and better visibility on its near-term outlook, with FY18-19 expected to be weaker amidst suppressed petroleum charter rates. Nonetheless, management is still continuingly seeking opportunistic investments, backed by its healthy balance sheet and net-gearing levels of 0.2x. Reiterate OUTPERFORM as we see the recent sell-down as overdone, backed by decent dividend yields of c.5%.

Lumpy earnings. During the briefing, management gave some clarity over its distorted reported earnings over the past several quarters. For the past 1-2 FYs, reported earnings were affected by several nonoperational but financially impactful factors such as GKL adjudication, Benchamas’ construction profit, and reversal of provision for receivables. In FY17, these factors contributed to approximately USD228m impact to the group’s reported bottom-line. Furthermore, different accounting treatments between charters (i.e. finance lease for newer charters, while older charters are still recognised as operating lease) also further contributed to the lumpy earnings. Moving forward, management guided for additional USD40-50m one-off financial items for the remainder of FY18, which include: (i) impairment of receivables for Yemen LNG, (ii) impairment of vessels, and (iii) offshore related adjustments. Nonetheless, these factors are not expected to have any material impact towards the group’s operating cash flow.

Expecting weaker FY18-19. Losses in its petroleum tanker segment are expected to continue given suppressed charter rates. Overall, we see no signs of a sustainable recovery in charter rates on the back of OPEC-led production cuts as well as tonnage oversupply in the market. As at end-1Q18, 45% of its petroleum and chemical portfolio are on spot charters, and as such, any weakness here would be immediately impactful towards the group’s earnings. Management guided that this would lead to roughly a c.10% deterioration in core operating cash flow for FY18E (from FY17A of roughly c.USD1.2b) should charter rates continue at these low levels, which is also somewhat in-line with our projections. Nonetheless, bulk of MISC’s earnings is still sustained by long-term LNG charters, which are largely expected to be stable. That said, we believe maintaining current dividend pay-out of 30.0 sen per share for FY18-19E is still achievable despite the lower cash flow.

Projected capex of c.USD1b per annum. During the briefing, management also shared that it is in pursuit of an acquisition of an offshore vessel, which comes with a 10-year charter contract. No other details or specifications were mentioned. We believe this to be within the capex projection of roughly c.USD1b per year, with the acquisition estimated to be valued at roughly USD250m. Overall, MISC’s balance sheet still remains relatively strong, with net-gearing of 0.2x, making it well-positioned for further opportunistic investments, if any.

Reiterate OUTPERFORM, as we see value re-emerging after its recent sell-down amidst poor market sentiment, despite fundamentals remaining relatively unchanged from recent geo-political developments. At current prices, MISC offers a decent dividend yield of c.5.0%. We maintained our TP of RM7.15, based on FY18E PBV 0.9x, which is roughly -0.5S.D. from its 5-year mean. No changes were made to our FY18-19E numbers. Risks to our call include: (i) weaker-than-forecasted charter rates, (ii) stronger-than-expected MYR/USD exchange rates, (iii) lower-thanexpected number of operating vessels, and (iv) slowdown of global economy.

Source: Kenanga Research - 5 Jun 2018