Despite coming in strong, FY19 results still fell slightly below expectations. Stronger earnings were mainly helped by improving charter rates and higher number of operating vessels. Moving forward, further escalation of Covid-19 could lead to weakened charter rates. Nonetheless, our investment thesis for the stock still remains intact – defensiveness in its consistent dividend pay-outs as a bluechip counter. Maintain OP, with lowered TP of RM8.70.

Results below expectations. MISC recorded full-year FY19 core net profit of RM1,609.5m (arrived after stripping-off non-core items e.g. impairments, gains/losses on acquisitions and disposals), coming in below expectations, making up 94%/91% of our/consensus forecasts, due to: (i) losses in heavy engineering, and (ii) higher-than-expected finance and tax expenses. Nonetheless, the company also announced an interim dividend of 9.0 sen, plus a special dividend of 3.0 sen per share, bringing FY19 full-year dividend to 33.0 sen per share – exceeding analysts’ expectations and its “usual” pay-out of 30.0 sen per share.

Stronger FY19 results. 4QFY19 saw a core net profit of RM368m, representing a 12% YoY decline. Although the quarter posted stronger operating profit helped by: (i) stronger LNG segment from higher number of operating vessels, and (ii) stronger petroleum segment from recovery of freight rates, bottom-line ultimately saw a decline, overwhelmed by: (i) higher finance costs, and (ii) plunge in share of JV profits, as the prior year recorded a financial gain following a contract extension for FPSO Ruby II. Sequentially, core net profit improved 15% QoQ, helped by seasonally stronger charter rates which lifted its petroleum segment. Cumulatively, FY19 core net profit rose 22%, thanks to: (i) stronger LNG segment from higher number of vessels in operation, (ii) turnaround in petroleum shipping following a recovery of charter rates, and (iii) narrowed losses in heavy engineering, offsetting poorer offshore segment due to recognition of demobilisation costs.

Poorer spot rates could impact earnings. Management has reassured that operational impact from the Covid-19 outbreak is quite controlled, given the minimal number of vessels plying China. Nonetheless, further escalation of the outbreak could lead to weakened spot charter rates, which in turn could negatively impact MISC’s petroleum shipping business. As a reference, 28% of MISC’s tanker vessels are in the spot market. Nonetheless, this should be partially mitigated by 7 new deliveries of DPST vessels throughout 2020. Meanwhile, the company is still in active tenders for FPSO contracts, including in Limbayong, off Sabah, and Mero-3 in Brazil, with expected contract award dates in the later parts of the year.

Maintain OUTPERFORM. Post-results, our FY20E CNP is trimmed by 11%, after accounting for: (i) lower contributions for heavy engineering and JV profits, and (ii) higher finance and tax expenses assumptions, while simultaneously introducing FY21E figures. Following so, our TP has also been lowered to RM8.70 (from RM8.90 previously), pegged to unchanged PBV of 1.1x – which implies 24x forward PER.

Despite its outlook slightly wavered in recent weeks, our investment thesis still remains intact – defensiveness in consistent dividends, especially after a bumper dividend for FY19. In fact, despite the weaker YoY 4QFY19 earnings, its operating cash flow actually improved, suggesting that the decline was merely due to accounting treatments.

Despite being the best performing FBMKLCI composite stock in 2019, it is still one of the better yielding ones (~4% yield) among blue-chip counters even at these levels.

Risks to our call include: (i) weaker-than-forecasted charter rates, (ii) stronger-than-expected MYR/USDexchange rates, (iii) lower-thanexpected number of operating vessels, and (iv) slowdown of global economy.

Source: Kenanga Research - 19 Feb 2020