MISC’s 1QFY23 results exceeded expectations. Resilient petroleum freight rates more than offset earnings drag from lower progress on Mero-3 conversion works. We are mindful of the production cuts of 1.7m bpd by OPEC+ that may likely cause tanker rates to retreat. We raise our FY23-24F earnings forecasts by 22% and 13%, respectively, increase our TP marginally to RM7.60 (from RM7.50) but maintain our MARKET PERFORM call.
Outperformed expectations. MISC’s 1QFY23 core net profit of RM707m surpassed expectations – coming in at 34% and 32% of our full-year forecast and the full-year consensus estimate, respectively. The variance versus our forecast mainly emanated from higher-than expected petroleum freight rates.
The core net profit excludes, amongst others, chunky asset impairment of circa RM96m. This mainly relates to: (i) 5-6 vessels at the Gas and Asset Solutions segment with contracts that are approaching expiry or have expired (RM48.9m), and (ii) intangible assets related to start-up ventures (RM47.3m).
QoQ slump due to weaker petroleum charter rates. The weakness in 1QFY23 sequential earnings was mainly driven by lower daily charter rates (DCR) for the petroleum fleet. This was underpinned by contraction in tanker demand due to: (i) seasonally weaker refinery runs, and (ii) oil supply squeeze following earlier OPEC+’s production cuts. To a lesser extent, bottom line was also dragged by slower recognition of progress billings for FPSO Mero-3 conversion works. This was partly due to closure of Mero-3’s fabrication yard during festive holidays in China. The factors above more than offset a surge in contribution from joint ventures. We believe this largely emanated from recognition of one-off gains (USD10m-12m) arising from the contract extension of FPSO Ruby.
YoY uplifted by absence of Mero-3 headwinds. On the other hand, YoY earnings growth was largely driven by the petroleum segment due to higher margin on freight rates. To recap, petroleum DCRs troughed in 1QCY22 before its steep ascent, driven by the Russia-Ukraine war. Additionally, to a smaller magnitude, 1QFY23 earnings were propped by normalization of Mero-3’s project progress (completion: 85%). Recall that in 1QFY22, Mero-3 was hit by a surge in construction costs following global supply chain interruptions and lockdowns in parts of China.
OPEC+’s cuts may hurt tanker markets. According to Tradewinds, OPEC+’s recent surprise production cuts (start: May-23) of 1.7m bpd will likely impact tanker markets. This is on the back of substantially lower demand for crude transportation. Nevertheless, according to ship broker BRS Group, the hit on smaller sized tankers (i.e. suezmax and aframax) is cushioned by ongoing European sanctions on Russian crude. To recap, the sanctions have led to increased demand from China and India to haul barrels from Russia. However, large-sized VLCCs do not load at Russian ports. Therefore, smaller tankers are needed to transport cargoes from West to East. Recall that MISC has a larger fleet of 26 aframax and suezmaxes (VLCCs: 10 units).
Forecasts. We raise our FY23-24F earnings forecasts by 22% and 13%, respectively, to reflect higher petroleum spot rates. Correspondingly, we lift our TP (based on Sum-of-Parts) marginally to RM7.60 (from RM7.50) (see Page 4). Note that our valuations reflect a 5% premium to account for MISC’s 4-star ESG rating as appraised by us (see Page 6).
We like MISC due to: (i) its recent fleet expansion and modernization, (ii) success in securing mega FPSO projects (i.e. Mero- 3) and new contracts from international clients, and (iii) margin expansion coupled with smoother earnings following diversification to less commoditized specialist vessels (e.g. DP Shuttles, VLECs). However, demand for petroleum tankers will likely be dampened by OPEC+’s latest production cuts. Maintain MARKET PERFORM.
Risks to our call include: (i) lower-than-expected utilisation and spot rates for petroleum fleet, (ii) additional cost overruns and project delays for Mero-3, and (iii) production cuts by major oil producers.
Source: Kenanga Research - 25 May 2023
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