MISC posted a weaker set of 2Q18 results, dragged by poorer LNG and petroleum shipping segments coupled with widening losses from MHB. Nonetheless, dividend payment remains consistent at 7.0 sen per share. Moving forward, we see weaker earnings for the next 1-2 years given suppressed charter rates. Downgrade to MP, with TP of RM6.65, as we believe MISC is fairly valued after recovering from a strong sell-down in late-May.

Below expectations. 1H18 core profit of RM631.9m came in below expectations at only 36% of both our and consensus forecasts. The mismatch was mainly due to wider-than-expected losses from its petroleum shipping segment, lower-than-expected contributions from its LNG shipping segment, coupled with the set of disappointing results from MHB (UP, TP: RM0.695). However, announced dividend per share of 7.0 sen was within expectations, bringing YTD dividend payment to 14.0 sen, similar to 1H17.

YoY poorer results overall. YoY, 2Q18 core profit of RM320.2m plunged 55%, attributed to: (i) LNG segment core PBT diving 51%, due to an early termination compensation received in 2Q17 for Tenaga Lima of RM145.9m, coupled with lower charter rates for the contract renewal of Puteri Firus in Oct 2017, (ii) Petroleum shipping’s widening segmental losses to RM54.4m from RM20.1m, due to poor charter rates and higher depreciation costs from new vessel deliveries, and (iii) greater losses contribution from MHB which had just reported 1Q18 core net loss of RM49.5m, from RM9.8m in 2Q17. YTD-YoY, 1H18 similarly plummeted, by 53%, partially due to similar reasons mentioned above as (i) Petroleum shipping sunk into segmental losses of RM93.6m, from RM62.5m segmental profit in 1H17, (ii) LNG shipping operating profit dropped 38%, coupled with (iii) adjudication gain from GKL in 1Q17 and lower construction revenue for FSO Benchamas 2, resulting in Offshore segmental profit dipping by 36%. Sequentially, 2Q18 core profit was relatively flat QoQ at +3%. The slight bump in earnings was due to jump in JV profit by 4.5x, offsetting poorer results in LNG, Petroleum shipping and MHB.

Expecting weaker FY18-19. Post-results, we slashed our FY18-19E earnings by 16-10%, after widening our losses assumption for Petroleum shipping and MHB. Moving forward, we are expecting weaker earnings outlook for FY18-19 due to continuingly suppressed charter rates given oversupply in the market, in which we see no catalysts yet for a sustainable recovery. Newbuild deliveries are expected to remain strong for LNG vessels, while accelerated scrapping activity for tankers of late is still largely saddled by the high number of deliveries seen over the past two years.

Downgrade to MARKET PERFORM. Given the weaker earnings outlook, we lowered our PBV valuation to 0.85x from 0.9x previously, resulting in a lower TP of RM6.65 from RM7.15 previously. We see the share to be fairly valued at current levels, after bouncing back from its heavy sell-down in late-May. At these levels, the share is also backed by decent dividend yields of around 4-5%.

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 - 8 Aug 2018