3QFY21 results came below our expectations, dragged by poorer petroleum shipping segment in line with weaker spot charter rates. Nonetheless, heading into the winter months, we are expecting tanker spot rates to pose a modest recovery, while mid-term recovery outlook also seems increasingly promising given OPEC+’s increasing oil supply coupled with the continued economic recovery. Maintain OP, with TP of RM8.05, backed by stable ~5% dividend yields.

9MFY21 below our expectations. 9MFY21 recorded core net profit of RM1.4b came in below our expectations, making up only 67% of our full-year forecasts, mainly dragged by the weak spot charter rates for its petroleum shipping. However, the results were above consensus, coming in at 83% of street’s estimate, most probably due to the street’s overly conservative assumptions on spot rates. Meanwhile, dividend of 7.0 sen per share is within expectation, bringing YTD dividends to 21.0 sen (flat YoY).

Earnings dragged by poorer petroleum shipping. Cumulatively, 9MFY21 earnings dipped 14% YoY, mainly dragged by the poorer petroleum shipping segment due to lower freight rates. This was partially offset by the higher offshore business contribution given the recognition of construction gains from Mero-3 FPSO.

For 3QFY21, core net profit came in at RM410m – representing a 53% jump YoY. While losses in its petroleum shipping segment had widened YoY, gains were mainly attributable by better LNG shipping amidst higher earning days from new deliveries, coupled with the aforementioned construction gains from Mero-3 FPSO. Sequentially, core earnings deteriorated 29% QoQ, mainly dragged by its petroleum shipping segment dipping into losses given poorer spot rates, while last quarter also saw a gain from compensation recognition for a contract renegotiation in its petroleum shipping segment.

Tanker spot rates expected to see gradual recovery. In the short term, the tanker market is expected to see some modest improvements heading into the winter months. Meanwhile, over the medium term, prospects of a recovery also look more promising, driven by OPEC+ phased supply increases and continued economic recovery, with tanker demand expected to revert close to 2019 levels by 2HFY22. However, for MISC’s group earnings, the coming quarters could be partially dragged by lower construction gains from Mero-3 amidst higher project costs recognition – in-line with its finance lease accounting.

Maintain OUTPERFORM, with a slightly lowered TP of RM8.05 (from RM8.10 previously) – pegged to unchanged valuations of 1.1x PBV, backed by ~5% yield. Post results, we cut our FY21E/FY22E earnings by 10% each to account for lower spot rate assumption.

Nonetheless, we continue to like the stock for its stable dividend yields of ~5%, coupled with an 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) poorer-than-expected dividend pay-out, (ii) weaker-than-forecasted charter rates, (iii) stronger-than-expected MYR/USD exchange rates, and (iv) lower-than-expected number of operating vessels.

Source: Kenanga Research - 19 Nov 2021