3Q18 results disappointed, owing to increased dry-docking activities, higher finance costs and losses in MHB. Nonetheless, dividend payment remained consistent at 7.0 sen per share. Moving forward, we see little catalysts for earnings recovery over the next 1-2 years given the suppressed charter rates outlook, although we believe dividend payments should remain intact. Maintain MARKET PERFORM with an unchanged TP of RM6.65.

Below expectations. 9M18 core net profit of RM906.2m came in below expectations at only 61% each of our and consensus full-year earnings forecasts. The mismatch was owing to: (i) lower LNG contribution due to increased vessels dry-docking activities, (ii) higher finance costs on the back of increased borrowings drawdown following the YTD delivery of two Seri C Class LNG newbuilds, and (iii) wider-than-expected losses from MHB (MP, TP: RM0.64). Nonetheless, the announced dividend of 7.0 sen per share was within expectations, bringing YTD dividends to 21.0 sen per share, similar to the previous year.

Poorer results overall. 3Q18 core net profit of RM274.3m plunged 57% YoY on the back of: (i) a dive in LNG due to increased dry- docking, (ii) lower offshore contributions due to GKL adjudication and FSO Benchamas 2 construction profit recognised in 3Q17, (iii) losses in MHB, and (iii) higher finance costs by 68%. On a sequential basis, 3Q18 core net profit deteriorated 14% QoQ on the back of: (i) lower LNG contribution due to dry-docking, coupled with (ii) increased finance costs by 11%.

Cumulatively, 9M18 core net profit plummeted 55% YoY, driven by: (i) lower LNG contribution due to dry-docking and lowered charter rates, (ii) jump in losses in petroleum shipping on the back of depressing charter rates, (iii) plunge in offshore contributions given the recognition of GKL adjudication and construction profit from FSO Benchamas 2 being recognised in the prior periods, and (iii) higher finance costs by 45%.

Cash flow still intact. Despite 3Q18 earnings more than halved YoY, operating cash flow for the company remains largely intact, dropping only 11% YoY on a USD-basis. As such, we do not see much risk in its consistent dividend payments, at least for the time being. Moving forward, while charter rates are expected to face a seasonally stronger 4Q due to the winter months, we are still anticipating it to remain weak overall given the high vessel deliveries in the market until 2019, furthering the oversupply situation in the market. This means that we would unlikely see a turnaround in MISC’s loss-making petroleum shipping segment for the time being, given that 41% of its portfolio is on spot-rate charters.

Maintain MARKET PERFORM, seeing a lack of any re-rating catalysts in the short-to-medium-term. Post-results, we slashed our FY18-19E earnings by 13-16%, after adjusting for: (i) lower LNG contribution, (ii) higher finance costs, while also (iii) accounting for wider losses assumption in MHB. However, our TP is kept at RM6.65, pegged to unchanged valuations of 0.85x FY19E PBV. At these levels, our call is backed by decent dividend yields of 4-5%.

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 - 21 Nov 2018