1HFY21 results, deemed within expectations, saw deteriorated YoY core earnings from weaker petroleum shipping spot rates, widened losses in heavy engineering and higher vessel opex for LNG shipping. Overall, short- term outlook for petroleum tanker spot rates continues to remain challenging, and we see this as the biggest external risk to MISC’s quarter-to-quarter earnings fluctuations. Maintain OP and TP of RM8.10, backed by stable dividends of ~5% yields.

1HFY21 within expectations. 1HFY21 core net profit of RM1,031m (arrived after adjusting non-core items, e.g. impairments etc) is deemed to be within expectations, coming in at 48% of our, and 55% of consensus, full-year forecast. Announced interim dividend of 7.0 sen per share brings YTD dividends to 14.0 sen (flat YoY), also within expectations.

Bottom-line sees sequential recovery. QoQ, 2QFY21 managed to see core net profit jumping by 27% to RM577m. This was largely thanks to a compensation for contract renegotiation (estimated ~RM180m), boosting its petroleum shipping segment and masking the weaker spot charter rates. Additionally, narrowed losses from heavy engineering (i.e. MHB) had also helped contribute to the better bottom-line. These managed to offset weaker offshore segment, due to lower construction gains from the Mero-3 FPSO. YoY, 2QFY21 CNP was largely flattish (- 1%), as the (i) aforementioned contract renegotiation compensation for its petroleum shipping, (ii) narrowed losses in heavy engineering, and (iii) offshore construction gains from the Mero-3 FPSO, managed to offset weaker LNG due to higher vessel opex.

1HFY21 saw its earnings deteriorated by 27% YoY, led by: (i) plunge in spot charter rates dragging its petroleum shipping, (ii) weaker LNG shipping from higher vessel opex, and (iii) widened losses in heavy engineering. This was partially offset by a better offshore segment from construction gains in Mero-3 FPSO.

Spot petroleum tanker rates to remain challenging. In the short term, the tanker market outlook is expected to continue facing depressed charter rates given pressures from vessel oversupply coupled with the ongoing pandemic. We see this as the largest external risk for MISC’s quarter-to-quarter earnings fluctuations, as currently 28% of its petroleum shipping fleet is exposed to the spot market. Meanwhile, MISC is still in tenders for the Limbayong FPSO, offshore Sabah, competing against several other local names. The contract is expected to be for a period of 12+3+2 years.

Maintain OUTPERFORM, with unchanged TP of RM8.10, pegged to 1.1x PBV. Post-results, we make no changes to our FY21-22E numbers.

Our OUTPERFORM call is premised on its stable and attractive dividend yields of ~5%, coupled with its ESG-compliant angle, inclusion in the F4GBM Index as well as it 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, and (iii) lower-than- expected number of operating vessels.

Source: Kenanga Research - 16 Aug 2021