The poorer FY18 core earnings (plunged 49% YoY) came within expectations, dragged by poorer performances across all segments. Nonetheless, we see little risk to its consistent dividend pay-out of 30.0 sen per share as operating cash flow remains stable. Our forecasts imply 10-8% earnings growth for FY19-20, driven by recovery of drydocking and mild improvements in petroleum shipping. Maintain MARKET PERFORM with TP of RM6.65.
 

Within expectations. FY18 core net profit of RM1,322m (arrived after stripping off impairments and gains on acquisitions/disposals totalling to RM10.9m) came in within expectations at 103%/95% of our/consensus forecasts. Announced dividend of 9.0 sen per share is also within expectations, bringing FY18-YTD dividends to 30.0 sen per share (flat YoY).

Weaker FY18 results. FY18 core earnings halved YoY, dragged by: (i) lower LNG contributions due to renewal and suspension of charter contracts, (ii) widening of petroleum shipping losses given lower spot charter rates and higher bunker costs, (iii) poorer offshore segment after bumper earnings in the prior year from Gumusut-Kakap adjudication and construction profit from FSO Benchamas 2, (iii) losses in MHB on the back of deferments in dry-docking activities during the year, and (iv) jump in finance cost due to increased borrowings drawdown following the delivery of two Seri C Class LNG newbuilds.

For the individual quarter of 4Q18, core net profit of RM416m declined by a third, YoY, dragged by its poorer offshore segment, losses in MHB, and jump in finance costs for similar reasons aforementioned, offsetting its improved shipping segment benefiting from a spike in spot charter rates in late 2018. Sequentially, core net profit leapt 52% QoQ, driven by its petroleum shipping segment due to the seasonally stronger spot charter rates during the winter.

Outlook moving forward. In efforts to rebalance its petroleum shipping’s exposure in the cyclical market, we gathered that it had scrapped 5 of its Aframax vessels during the quarter. We are positive on this, should the company continue exploring disposal opportunities, as we believe minimising the burden from underperforming assets could help reduce the segment’s fixed costs and mitigate losses from suppressed charter rates. Meanwhile for its offshore segment, the company is seeking FPSO opportunities in Brazil and Southeast Asia (e.g. Mero 2 (Brazil) and Limbayong (Malaysia) fields, to name a few) in order to expand the segment’s contribution towards the group. Its heavy engineering segment (i.e. MHB) is also expected to reverse losses in FY19 from increased dry-docking activities on the back of implementation of IMO2020 regulations.

Maintain MARKET PERFORM, with unchanged TP of RM6.65, pegged to 0.85x PBV (at -1 S.D. from its mean). Post-results, we tweaked FY19E earnings by +2% for housekeeping purposes, while introducing FY20E numbers. These numbers imply earnings growth of 10-8%, driven by increased dry-docking in MHB coupled with mildly improved petroleum shipping segment.

Meanwhile, we also see little risk to its consistent dividend payments of 30 sen per share for the time being (implying decent yields of 4.3%) given that its operating cash flow still remains fairly stable despite the huge plunge in profits. Overall, we believe the consistent dividend would help sustain its share price over the longer run, but in the shorter run, we see a trading range between RM6.50 and RM7.50.

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 - 25 Feb 2019