The strong 51% YoY core earnings growth in 1Q19 beat our estimates slightly, driven by improvements in spot freight rates. Moving forward, we believe the group is likely to post better earnings this year, from last year’s low-base, underpinned by better spot rates coupled with expected turnaround in MHB. We also see little risk to its consistent dividend payout (4.6% yield) as operating cash flow remains stable. Maintain MP and TP of RM6.65.

Above our expectations. 1Q19 Core Profit of RM469.3m (arrived after stripping off gains from acquisitions/disposals) came in slightly above our expectation at 32% of our full-year forecast, helped by better-thanexpected petroleum shipping due to higher spot freight rates. However, the results were within consensus’ expectation at 28%. Dividend of 7.0 sen per share (flat YoY) is also within expectation.

Improved results overall. YoY, 1Q19 core profit jumped 51%, mainly helped by a recovery in its petroleum shipping, from losses last year, due to higher spot freight rates, while other segments remained relatively flat. Sequentially, core earnings improved 13% QoQ, mainly from a recovery in LNG shipping as two LNG vessels (namely Seri Balhaf and Seri Balqis) had commercial arrangements in 4Q18, which resulted in the vessels being idle during the quarter. Meanwhile, its petroleum shipping has also managed to see some growth QoQ, despite charter rates tapering off from the year-end winter months, due to improved operating margins from lower bunker costs.

Better earnings expected for the year. Overall, we believe the group is likely to record some earnings growth this year, from a low base last year, underpinned by: (i) an improvement in the tanker spot charter rates market, coupled with (ii) return to profitability in 66.5%-owned MHB, driven by an expected recovery in dry-docking activities. Meanwhile, the group is also striving to grow its offshore segment via various FPSO bids both locally and international – one of which includes the FPSO for Limbayong field (Malaysia), rumoured to be bidding in partnership with YINSON.

Maintain MARKET PERFORM, with an unchanged TP of RM6.65, pegged to 0.85x PBV at 1SD below its 5-year mean. Post-results, we raised our FY19-20E earnings by 10-12% as we factored in stronger petroleum shipping. Our numbers imply earnings growth of 21-10%, respectively. Meanwhile, we also see little risk to its consistent dividend payments, implying decent yields of 4.6%, as its operating cash flow still remains fairly stable. Overall, we believe the consistent dividend would help limit the share’s downside risks over the longer run.

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 - 27 May 2019