Stronger 9MFY19 core earnings (+37% YoY) met our expectation, driven by improved LNG and petroleum shipping contributions. Moving forward, we expect earnings to recover from last year’s low base, underpinned by robust freight rates, while materialisation of FPSO bidding efforts could provide further catalyst. Maintain OP with slightly raised TP of RM8.90, with decent dividend limiting downside risks.

In-line with our expectations. MISC recorded 9MFY19 core net profit of RM1,241.5m (arrived after stripping off non-core items e.g. impairments, gains on acquisitions and disposals), coming in within expectation at 72% of our full-year forecasts. However, the results are deemed to be slightly below consensus at 69%, possibly due to the market’s over-optimism on spot freight rates during the quarter. Nonetheless, dividend of 7.0 sen per share is well within expectations.

Improved results for the year. Cumulative 9MFY19, core net profit jumped 37% YoY, helped mainly by: (i) turnaround in its petroleum shipping segment from recovery of freight rates, (ii) better LNG shipping following lower dry-dockings and addition of 2 LNG carriers, one each in Dec 2018 and Jan 2019, and (iii) narrowed losses in heavy engineering (i.e. MHB) from higher progress of ongoing projects.

For 3QFY19, the quarter registered a core net profit of RM321.3m, surging 17% YoY, helped by: (i) improved petroleum shipping from recovery in freight rates, (ii) better LNG shipping from lower dry- dockings and addition of 2 LNG carriers as aforementioned, and (iii) narrowed heavy engineering losses from further project progressions.

Sequentially however, core net profit dropped 29% QoQ, dragged by: (i) poorer petroleum shipping from lower spot freight rates, especially for Aframax charters in which the company is most exposed to the spot market, (ii) poorer LNG shipping segment due to lower number of earnings days, and (iii) lower offshore segment contribution, as last quarter recorded a bumper earnings recognition following a contract extension for FPSO Ruby II.

Improving outlook. We feel optimistic on MISC’s outlook, especially after a low earnings base last year. Freight rates have staged a decent recovery during the year, and are likely to remain robust moving forward, especially for the winter season in 4Q, as U.S. sanctions combined with tonnage being taken off market for scrubber installations have tightened supply. Meanwhile, global FPSO awards are also likely to remain strong for the next few years, especially from Brazil and Africa, with MISC identifying the FPSO market as one of the key growth drivers for the company.

Maintain OUTPERFORM. Our TP is raised slightly to RM8.90 (from RM8.80 previously) following some minor earnings model tweaks post- results for house-keeping purposes. Valuation remains unchanged, pegged to 1.1x FY20E PBV at +2SD from its 5-year mean, given the optimistic outlook. No changes were made to our FY19-20E. All things aside, we continue to like MISC given the improving outlook underpinned by recovery in freight rates, while successful materialisation of mega-sized FPSO bids could provide further re-rating catalyst. Being one of the better yielding stocks among the FBMKLCI also provides some defence against downside over the long run. The stock is also an ESG-play within the oil and gas sector, being a constituent of the FTSE4GOOD index.

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 - 14 Nov 2019