Stronger 4QFY20 was helped by construction gains from the Mero-3 FPSO, and JV gains from the extension of FPSO Espirito Santo, masking weaker spot tanker charter rates. Moving forward, spot tanker rates are still expected to remain weak given industry oversupply, with the group’s petroleum shipping segment to continue bleeding losses at least in 1HFY21. Nonetheless, we are hopeful that this could be mitigated by continued contributions from the Mero-3 FPSO. Maintain OP, albeit with lower TP of RM8.10, backed by stable ~5% yields.

Slightly above expectations. FY20 core net profit of RM2,159m (arrived after adjusting for non-core items e.g. impairments, gains on disposal, write-offs and provisions) came in slightly above expectations at 108% of our, and 106% of consensus full-year earnings forecasts. This is largely thanks to stronger-than-expected offshore segment from construction gains recognised for the Mero-3 FPSO, and higher JV contribution after recognition of accounting gains following the 5-year extension of its 49%-owned FPSO Espirito Santo. Likewise, announced interim dividend of 12.0 sen per share is also above expectations, bring full-year dividends to 33.0 sen per share (versus expected 30.0 sen).

Bottom-line boosted by accounting profits. FY20 saw its core net profit jumping 34% YoY, thanks to: (i) aforementioned accounting profits of construction gain from Mero-3 FPSO, and (ii) higher JV gains following the contract extension of FPSO Espirito Santo. Additionally, the year was also helped by stronger petroleum shipping, as a result of higher freight rates, especially during the earlier part of the year. The individual quarter of 4QFY20 recorded core net profit of RM479m, improving 79% QoQ. The aforementioned accounting profits from the construction of Mero-3 FPSO and extension of FPSO Espirito Santo managed to mask weaker petroleum shipping, which further widened losses given the weak charter rates.

Challenging spot tanker rates. Going into 2021, spot tanker rates seem to continue remaining weak after falling off from its peak earlier last year, with demand remaining uncertain while vessel oversupply continues to plague the market as 2021 will see a moderate increase in the number of newbuild deliveries. As such, we highly believe that MISC’s petroleum shipping segment will continue to be in the red, at least for 1HFY21. Hopefully, the impact of this could be partially offset by the continued contributions of the Mero-3 FPSO (officially named “Marechal Duque de Caxias”) that it secured back in Aug 2020.

Maintain OUTPERFORM, albeit with lower TP of RM8.10 (from RM8.90 previously) post-full year results model update, pegged to unchanged valuation of 1.1x PBV. Additionally, we raised our FY21E earnings by 7%, accounting for stronger offshore contributions, while introducing new FY22E numbers.

Nonetheless, our OUTPERFORM call is still backed by its stable and attractive dividend yields of ~5%, with the name also being highly rated in ESG compliance within its sector, being included in the F4GBM Index as well as receiving a 4-star ESG rating by FTSE Russell (the top 25% ESG Ratings amongst PLCs in FBM Emas that have been assessed by FTSE Russell).

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 - 19 Feb 2021