The poorer FY21 results were within our expectations, given the poorer spot petroleum charter rates throughout most of the year. Nonetheless, 4QFY21 numbers actually improved sequentially, reflecting an uptick in spot rates especially during the winter months. Overall, we expect fundamentals of the tanker market to continue improving, especially in 2HFY22. Maintain OUTPERFORM with a slightly lowered TP of RM7.90.

FY21 results in line with our expectation. FY21 recorded core net profit of RM1.9b – within our expectation at 97% of our estimate. However, the results were above street’s expectations at 113% of consensus, possibly due to market’s under-estimation of the stronger petroleum shipping spot charter rates especially for 4QFY21. Meanwhile, dividend of 12.0 sen per share is well within expectations – bringing YTD dividends to 33.0 sen per share (flat YoY).

Sequential earnings improvement. FY21 core earnings came in with a slight decline YoY (-13%), largely dragged by the poorer charter rates for its petroleum shipping. This was partially offset by higher contributions from its offshore business given the recognition of construction gains from Mero-3 FPSO. Nonetheless, 4QFY21 core earnings actually managed to improve 9% QoQ – largely thanks to: (i) turnaround in petroleum shipping, lifted by higher charter rates especially throughout the winter months, (ii) turnaround in heavy engineering amidst higher activities, and (iii) higher earnings days for its LNG shipping.

Tanker market expected to continue recovery. While overall freight rates for the petroleum shipping market continues to remain low, especially in comparison with pre-pandemic days, spot rates have started to see some recovery in 4QCY21 amidst the winter season as oil demand continues its recovery trajectory. We expect fundamentals of the tanker market to continue improving, especially towards 2HCY22, although the uncertainty of the Omicron variant and its impact towards oil demand remains the largest uncertainty. That said, the group is adopting a long-term strategy of securing more time charter contracts (as opposed to spot charters) via niche and eco-friendly shuttle tankers, in efforts to improve stable cashflows.

Maintain OUTPERFORM. Post results, we made no changes to our FY22E earnings, while introducing new FY23E numbers. Our TP is also slightly lowered to RM7.90 (from RM8.05 previously), as a result of (i) post-full year results model update, which includes encompassing the RM112m recorded impairments in FY21, (ii) rolling forward of our valuation base year, coupled with (iii) mildly lowering our valuation slightly to 1.0x PBV, from 1.1x PBV previously, to reflect a correction in the stock’s mean valuations over the past 12 months (current valuations still based on +2SD from mean).

We continue to like MISC for the defensiveness of its stable dividends as a blue-chip counter, yielding ~5% at these price levels, as well as being a beneficiary of the global recovery in oil demand and the tanker market. ESG-wise, the group is a constituent of the FTSE4Good Index, receiving a 4-star ESG rating by FTSE Russel (the top 25% ESG ratings amongst PLCs in FBM Emas that have been assessed).

Risks to our call include: (i) poorer-than-expected dividend pay-out, (ii) project execution risks, (iii) fluctuations in spot charter rates, and (iv) fleet utilisation levels, especially within the spot market.

Source: Kenanga Research - 18 Feb 2022