1HFY22 results missed expectations on construction cost overrun at its offshore division and further project delays at its Mero-3 FPSO currently undergoing conversion works due to lockdowns in China and the persistent global supply chain issues. We cut our FY22-23F earnings by 23% each, lower our SOP-derived TP by 7% to RM7.05 (from RM7.55). Maintain MARKET PERFORM.

1HFY22 results missed expectations. MISC reported 1HFY22 core net profit of RM658m (arrived after stripping off impairments and gains on disposals) – coming in below expectations at only 41% and 36% of our and consensus full-year forecasts, respectively. This is largely due to the poorer offshore business contributions, which suffered from construction costs overrun for its Mero-3 FPSO given the recent lockdowns in parts of China, where conversion works are currently being done.

Poorer results overall. 1HFY22 saw core earnings plunging 36% YoY, largely dragged by the aforementioned poorer offshore business, coupled with the lower contribution from petroleum shipping as last year saw the recognition of a contract renegotiation compensation gain. This masked the better spot tanker rates which the segment has thus far enjoyed throughout this year. Meanwhile, the weaker results were also partially offset by the better gas and asset solutions segment (formerly known as LNG shipping) on the back of higher working days coupled with lower dry-docking activities.

Delay in Mero-3 delivery. The lockdowns in parts of China as well as the global supply chain issues are expected to lead to continued delays and cost overruns for its Mero-3 FPSO. The Mero-3 FPSO, which will serve Petrobras’ giant Mero field in the Santos basin, is currently undergoing conversion works at CIMC Raffles shipyard, with the delivery date now likely to be pushed further to 2024 (from initially expected 2023). On a more positive note, spot rates for petroleum shipping tankers are now enjoying a multi-year high, in tandem with the growth in global oil demand. This is expected to bolster its petroleum shipping segment, which currently has ~28% of its fleet exposed to the spot market.

Forecasts. We lowered our FY22-23F earnings by 23% each to account for the weaker offshore business due to the continued costs escalation.

Maintain MARKET PERFORM. Following our earnings cut, our SoP TP is also lowered to RM7.05 (from RM7.55 previously). Note that our valuations have already taken into account our in-house ESG rating of 4-star for the stock.

Risks to our call include: (i) poorer-than-expected fleet utilisation, (ii) project execution risks, and (iii) fluctuation in spot charter rates.

Source: Kenanga Research - 19 Aug 2022