1HFY20 core net profit of RM1.4b (+53% YoY) is deemed broadly within expectations, on anticipation of a weaker 2HFY20. Results were helped by strong spot rates earlier in the year due to the global shortage of oil storage space, but rates have been in a decline after April 2020. The trend is largely expected to continue into the 2HFY20, with 3Q also typically being a seasonally weaker quarter for spot rates. Maintain OP, with TP of RM8.90, as a defensive dividend play (fetching ~4% yield) among the blue chip counters.

Broadly within expectations. MISC reported 1HFY20 core net profit of RM1.4b (arrived after adjusting for non-core items e.g. impairments, gains on disposals, write-offs, and provisions), coming in at 66%/69% of our/consensus full-year earnings forecasts. Nonetheless, we deem this as broadly within expectations, in anticipation of a weaker 2HFY20. 1HFY20 core earnings has been boosted by high petroleum shipping charter rates as a result of a global shortage in oil storage space earlier in the year. However, spot charter rates have tapered off post-April 2020, and the trend is largely expected to exacerbate into 2HFY20. This is on top of the fact that 3Q is generally a seasonally weaker quarter for spot tanker rates. Meanwhile, the group also announced a dividend of 7.0 sen per share, bring YTD dividends to 14.0 sen per share, also within expectations.

Improved YoY results, but earnings declined sequentially. 1HFY20 posted a 53% surge in core earnings YoY, thanks to the aforementioned stronger spot charter rates, lifting its petroleum shipping segment. This was sufficient to offset widened losses in its heavy engineering segment as its yards were unable to operate fully during the MCO.

For the individual quarter of 2QFY20, core earnings surged 30% YoY, mainly due to similar reasons of improved spot charter rates. Its LNG segment was also marginally higher thanks to higher earnings days following no dry-docking activities during the quarter. These were partially offset by widened losses incurred in heavy engineering. Sequentially however, 2QFY20 core earnings declined 29% QoQ, suffering from lower charter rates for its petroleum shipping, coupled with losses incurred in its heavy engineering due to yard suspensions during the MCO period.

Largely expecting a weaker 2HFY20. Tanker spot rates have been in a declining trend post-April 2020, and are expected to continue to remain under pressure for the time being, with recovery dependent on global oil demand recovery. As such, we can safely expect 2HFY20 to post weaker half-on-half earnings, with 3Q also being a seasonally weaker quarter for charter rates. Currently, 24% of the group’s petroleum tankers are on spot charters. Moving forward, we expect the group’s exposure towards spot rate fluctuations to gradually reduce over the longer-term as deliveries of longer-term charters start to come in. Meanwhile, the group is also confident of bagging the Mero-3 FPSO contract from Petrobras soon, which could act as a positive share price catalyst. As we understand, Petrobas and MISC are currently at their advanced stages of exclusive negotiations, and hence, the contract should most likely be awarded before end of the year.

Maintain OUTPERFORM, and TP of RM8.90, pegged to 1.1x PBV at +2SD from mean. Post-results, we marginally raised our FY20E/21E earnings by 4%/6% as we lowered our finance cost assumptions to account for the lower interest rates environment. Overall, we continue to like MISC as a defensive play among blue chip counters, given its reliable and consistent dividend pay-outs (fetching ~4% yields). The group is also among the least impacted from the current oil and gas down cycle.

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.

Source: Kenanga Research - 14 Aug 2020