Stronger 1H19 core earnings (+46% YoY) beat our expectation slightly, due to improved spot rates. Moving forward, we believe the group is likely to post better earnings, given last year’s low-base, underpinned by better spot rates coupled with an improved outlook for MHB. We also see limited risk to its consistent dividend pay-outs (~4% yield) as operating cash flow remains stable. Maintain MARKET PERFORM with TP of RM7.60.

Slightly above our expectation. MISC recorded 1H19 core net profit of RM920m (arrived after stripping-off non-core items, e.g. impairments), coming in slightly above our expectations at 57% of full year forecast, helped by its better-than-expected petroleum shipping segment. However, the results are deemed to be within consensus’ expectations at 53%. Dividend of 7.0 sen per share is well within expectation.

Improved results YoY. For the 1H19, core net profit jumped 46% YoY, largely attributed to: (i) turnaround in its petroleum segment on improved charter rates, and (ii) narrowed losses in MHB (66.5% subsidiary) from increased dry-docking activities and greater project progression for its heavy engineering division.

Meanwhile, 2Q19 core net profit similarly leapt 41% YoY, driven by: (i) improved performance in petroleum shipping due to improved charter rates, (ii) narrowed losses in MHB from higher dry-docking activities, and (iii) higher contributions from LNG shipping following the delivery of two Seri C vessels in March 2018 and May 2018. Sequentially, 2Q19 core net profit marginally dipped 4% QoQ, largely due to seasonally weaker spot charter rates post-winter, dragging its petroleum shipping segment.

Earnings growth expected for the year. The group seems likely to see some earnings recovery for the next 1-2 years, after suffering from a low earnings base last year. Spot tanker rates during this year’s winter had been noticeably much stronger, rebalancing after high levels of scrapping in 2018, although OPEC-led oil production cuts may hamper shipping volumes in the shorter term. Nonetheless, implementation of IMO2020 could provide a slight ripple in vessel supply for 2H19. Meanwhile, the FPSO market (both globally and locally) is also another key growth area identified by the company in which it has increased efforts to tap into. MHB’s outlook is also expected to improve after its recent Kasawari project EPCIC win, boosting its order-book to a multi-year high of ~RM3b.

Maintain MARKET PERFORM. Post-results, we raised our FY19-20E earnings forecasts by 7-3%, after (i) factoring in stronger petroleum shipping, and (ii) raising our MYR/USD assumption to RM4.10, from RM4.00 previously. As such, given the better-than-expected set of results (two consecutive quarters of beating expectations), we raised our TP to RM7.60 (from RM6.65 previously), pegging it to 0.95x PBV on FY20E – roughly in-line with its 5-year mean valuations (from 0.85x PBV at -0.5SD previously).

Our call is further backed by its stable dividends, implying yield of ~4%, which is one of the better ones among FBMKLCI constituent stocks (behind banks). 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-than expected number of operating vessels, and (iv) slowdown of global economy.

Source: Kenanga Research - 15 Aug 2019