As expected, 3QFY20 came in weaker, dragged by the sharp drop in spot tanker rates for its petroleum shipping segment, as well as lower number of earnings days for its LNG shipping. After peaking earlier in the year, spot tanker rates are expected to remain weak at the moment, given weak oil demand coupled with supply-side pressure from excess tonnage capacity. Nonetheless, most of MISC’s portfolios are still in long-term charters, which will be further boosted by upcoming vessel deliveries, and remain largely unaffected by spot market fluctuations. Maintain OP and TP of RM8.90, as a defensive blue-chip play, fetching ~4% dividend yield.

Within expectations. 9MFY20 core net profit of RM1.7b (arrived after adjusting for non-core items e.g. impairments, gains on disposals, write- offs and provisions), came in within expectations at 75% of our and 79% of consensus full-year earnings forecasts. Announced interim dividend of 7.0 sen per share is also within expectations, bring YTD dividend to 21.0 sen per share (flat YoY).

Weaker quarter, as expected. As per our expectations, 3QFY20 earnings came in sequentially weaker, with the core net profit of RM268m representing a QoQ decline of 54%. The decline in earnings was largely attributable to: (i) weaker petroleum shipping, due to the sharp drop in spot charter rates, and (ii) lower LNG shipping contribution due to lower number of earning days. YoY, 3QFY20 core earnings declined 17% largely on similar aforementioned reasons. Cumulatively, 9MFY20 core earnings were 35% stronger YoY. This was mostly attributable to the strong spot charter rates for its petroleum shipping in 1HFY20 as a result of global shortage in oil storage space earlier in the year.

Weak spot tanker rates. After peaking earlier in the year, spot tanker charter rates have plummeted especially starting from the 2H of the year. The weak spot rates are expected to persist for the time being, given the weak oil trade volumes coupled with supply side pressure from excess tonnage capacity. Nonetheless, most of MISC’s petroleum fleet (i.e. 65%) and almost all of its LNG fleet are on term charters, which would provide a steady stream of recurring income and would be largely unaffected by the fluctuations of the spot market. That said, the group is also expecting the deliveries of another 7 LNG vessels and 2 petroleum vessels until 1HFY21 (all of which are long-term charters), which will further boost the group’s sustainable and recurring income streams.

Maintain OUTPERFORM, and TP of RM8.90, pegged to unchanged valuations of 1.1x PBV. Post-results, we opt to conservatively trim our FY20E/FY21E by 11%/2%, as we lowered our petroleum shipping contribution assumptions, in light of the weakened spot rates.

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).

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 - 18 Nov 2020