1QFY22 results overall came in poor, dragged by slower progression in its FPSO conversion works due to the lockdowns in China, coupled with higher finance costs. Nonetheless, this was partially offset by newer LNG vessel deliveries, while petroleum tanker rates have remained stable. Following a slash in earnings forecasts, we downgrade the stock to MARKET PERFORM with a TP of RM7.70.

1QFY22 slightly below expectations. 1QFY22 core net profit of RM373m came in slightly below expectations at 20% and 19% of our and consensus full-year estimates, respectively. This was due to the weaker petroleum segment, coupled with higher finance costs. Nonetheless, an interim dividend of 7.0 sen per share is well within expectation.

Overall weaker quarter. QoQ, 1QFY22 core net profit declined 16%, mainly dragged by slower progress for its FPSO conversion works following recent lockdowns in China, coupled with the rise in finance costs. Additionally, JV contributions also shrunk significantly as last quarter saw the recognition of contract extension gains. YoY, 1QFY22 core net profit declined 36%, similarly due to the slower progression works for its FPSO conversion, further exacerbated by increased construction costs following recent lockdowns in China, coupled with the higher finance costs. This was partially offset by improved LNG shipping contributions following the delivery of three VLEC vessels.

Cost escalation for its FPSO projects. As mentioned earlier, the recent lockdowns in China are expected to lead to supply chain disruptions, cost overruns and even a possible delay in delivery time. The Mero-3 FPSO, which will serve Petrobras’ giant Mero field in the Santos basin, is currently undergoing conversion and fabrication works at CIMC Raffles shipyard, with delivery date expected to be in early 2023. However, we believe this timeline may potentially be pushed back as works are now slightly behind schedule. We believe this, coupled with the escalated costs, could potentially impact project returns of the contract – albeit at a relatively manageable quantum. Meanwhile, spot rates for Suezmax and Aframax tankers continue to remain strong amidst changes in crude oil trade patterns due to the Russia-Ukraine conflict.

Downgrade to MARKET PERFORM. Post results, we slashed our FY22-23E earnings by 19-20%, after accounting for slightly weaker petroleum segment contribution coupled with higher finance cost assumptions. Following so, our TP is also reduced to RM7.70 (from RM7.90 previously) – pegged to unchanged valuation of 1.0x PBV in- line with mean valuations.

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 - 27 May 2022