MISC’s 9MFY22 results exceeded expectations, thanks to strong petroleum shipping freight rates, albeit dampened by cost escalation at its Mero-3 FPSO. Overall, we like MISC for its cash flow resiliency, coupled with it being a beneficiary of strong shipping rates, but cost escalation may persist in the near term. We raise our FY22F/FY23F earnings by 56%/21%, increase our TP by 4% to RM7.30 (from RM7.05) and maintain our MARKET PERFORM call.

Results exceeded expectations. MISC’s 9MFY22 core net profit of RM1,472m (arrived after stripping-off impairments and gains on disposal) beat expectations. The number already exceeded our full year forecast by 19% while coming in at 94% of full-year consensus estimate. This key variance against our forecast came from stronger performance in the petroleum and product shipping segment, driven by higher spot freight rates coupled with a contract renegotiation compensation recognised during the quarter.

Earnings helped by stronger freight rates. YoY, 9MFY22 results stayed mostly flat with a marginal 2% core net earnings growth. While petroleum shipping hugely benefitted from the surge in spot freight rates, this was offset by weaker offshore business contributions amidst cost escalations for its Mero-3 FPSO.

Briefing highlights. The key takeaways from its analyst briefing last Thursday are as follows:

1. Petroleum tanker rates grew from strength to strength. Petroleum shipping market rates have continued to strengthen, supported by the rebounding oil production, shift to long-haul trade flows arising from the Ukraine invasion, as well as the increase of US crude flows to the Far East and South Asia. Note that 28% of the group’s petroleum shipping fleet is exposed to the spot market.

2. Concentrate on execution of FPSO projects on hand. The Mero-3 FPSO, which is currently undergoing conversion works at CIMC Raffles shipyard, has suffered cost escalations arising from the supply chain disruptions and recent lockdowns in parts of China. Hence, the group is now focused on successfully executing and delivering the projects at hand, before selectively pursuing bidding opportunities in targeted markets.

Forecasts. We raise our FY22F/FY23F earnings by 56%/21%, to account for the higher contributions from petroleum shipping amidst the surge in freight rates.

Maintain MARKET PERFORM. Following the earnings upgrade, our SoP-TP has also been raised to RM7.30 (from RM7.05 previously) (see Page 3). Note that our valuations reflect a 5% premium to account for MISC’s 4-star ESG rating as appraised by us (see Page 5).

Overall, we like MISC for: (i) its long-term LNG contracts providing cash flow resiliency, and (ii) being a beneficiary of the recovery in petroleum tanker spot rates. However, over the short term, we believe the group could face some project cost escalations, especially for its Mero-3 FPSO project.

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 - 21 Nov 2022