MISC's FY23 results met expectations. Its FY23 core net profit rose 12% thanks to favourable tanker rates and the addition of new vessels at its petroleum shipping division. Meanwhile, the performance of other divisions was stable. We raise our FY24F net profit forecast by 9%, lift our TP by 7% to RM7.51 (from RM7.00) and maintain our MARKET PERFORM call.

Its FY23 core profit of RM2.2b (excluding EI of RM234m impairment loss, on receivables, RM16.9m fair value loss on other investments, RM64.5m reversal of JV losses and RM84m petroleum renegotiation gain and RM12m disposal gain on ships) met expectation. It declared a DPS of 12 sen, largely within our expectation.

YoY, its FY23 revenue rose by 3% mainly due to better tanker rates and the addition of new vessels at its petroleum shipping division, alongside more work orders at its marine & heavy engineering division. Its gas & asset solutions divisions were largely flat. However, its core profit grew by a sharper 12% driven by higher margins from new petroleum tankers which covered the higher finance costs, though partially offset by losses from the marine & heavy engineering division.

QoQ, its revenue surged by 27% due to improved tanker rates in the petroleum division and increased contributions from the offshore business, notably from FPSO Mero 3 project completions. Its core profit nearly doubled, boosted by higher earnings from the petroleum division and offshore business, along with greater joint venture profits, partially offset by increased administrative expenses.

Briefing highlights. The key takeaways from MISC’s analysts briefing are as follows:

1. MISC anticipates the near-term market for petroleum tankers to remain strong, driven by increased crude imports to Asia, leading to longer ship voyages, and a global slowdown in vessel deliveries, which will keep supply tight. This positive outlook persists despite potential dampening effects from OPEC+ crude production cuts, which typically reduce demand for tanker vessels.

2. Its gas & asset solutions division faced a ship repair cost of USD5m in 4QFY23, but no further repairs are anticipated for FY24.

Consequently, it is expected that the division’s profitability will revert to its steady state, akin to the performance observed in FY22.

3. The Mero 3 project achieved a physical completion of 93.5% by 4QFY23, with the FPSO asset having sailed away on 24 Feb 2024.

Following the completion, MISC is now concentrating on finalising the pre-commissioning and commissioning phase. This phase is critical, as it necessitates final acceptance from clients for the recognition of the full charter income of the contract. Petrobras has targeted first oil to be in September 2024.

Forecasts. We raise our FY24F earnings forecast by 9% after imputing higher YoY increase in our petroleum tanker rate assumption of 3.5% (from 1.5%).

Valuations. We raise our SoP-TP by 7% to RM7.51 (see Page 3) from RM7.00 as we assume higher petroleum tanker market values in view of the stronger petroleum market outlook. There is no change to our valuation based on ESG given a 4-star ESG rating as appraised by us (see Page 5).

Investment case. We like MISC due to: (i) 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 improved earnings visibility following diversification to less commoditized specialised vessels (e.g. DP Shuttles, VLECs). However, incoming FPSO Mero 3 project’s execution risks remains high particularly when final acceptance is expected to approach in 4Q24.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 - 28 Feb 2024