MISC’s 1HFY24 core profit was in line with both our and consensus expectations. While its petroleum division outlook looks robust, the gas & asset solutions division remains challenged as reflected in weak LNG shipping spot markets, and FPSO Mero 3 is still undergoing the hook-up process, with a potential slight delay in achieving first oil. We maintain forecast, SoP-TP of RM8.09 and our MARKET PERFORM call as risk-reward appears balanced.

Within expectations. Its1HFY24 core net profit (after RM1.5m bad debt write back, RM43.5m fair value gain of other investments, RM17.7m net forex loss and RM74.1m gain on disposal), met our and consensus expectations at 55% and 52%, respectively. We deemed it within our expectations because we expect more weakness in its gas & asset solutions division and we do not anticipate another cost recovery claims in the heavy engineering division. A second interim DPS of RM0.04/share was declared, which was also largely within our expectation.

Petroleum and heavy engineering anchoring growth. In 1HFY24, revenue grew by 5% YoY as strong growth in the petroleum division (driven by higher tanker rates and increased vessel earning days) and the marine & heavy engineering division (due to higher work order recognition) was partially offset by lower revenue from the gas & asset solutions division (due to contract expiries and lower spot daily charter rates (DCR) for some vessels) and the offshore business (due to slower FPSO Mero 3 conversion revenue). Core profit surged by 28% YoY, supported by stronger EBIT margins from petroleum division and a turnaround in marine & heavy engineering EBIT margins, driven by the recognition of cost recovery claims (from loss of RM86m to EBIT profit of RM18m).

QoQ weaker. MISC’s top line declined by 9% QoQ in 2QFY24, with all divisions posting a decline, particularly the offshore business and gas & asset solutions. Lower DCRs contributed to weaker operating margins sequentially in the gas & asset solutions division, while the offshore division slipped into a loss position due to higher finance costs from FPSO Mero 3, hence dragging core earnings down by 12%.

Briefing highlights. Key takeaways from MISC’s analyst briefing include the following:

1. While VLCC rates have recently softened due to weaker import data from China, the petroleum shipping market remains robust due to increasing long-haul exports from the US, Brazil, and Guyana, combined with low expected global fleet growth. However, we believe that the petroleum division’s performance, with 90% of its fleet tied to term charters, will remain stable at best in the coming quarters.

2. The Mero 3 FPSO is still undergoing the hook-up process to prepare for first oil and final acceptance from the client, but it is experiencing slight delays due to riser connection issues. The group has stated that no additional costs will be incurred as a result of these issues.However, we do not discount the possibility of further delays in achieving first oil by the end of 3QFY24 or early 4QFY24 if additional hook-up issues arise. The asset is expected to contribute c. RM150m PAT per annum assuming final acceptance.

3. In the gas & asset solutions division, four LNG vessels are now operating on the spot market, but utilisation and rates remain unfavourable due to the challenging global LNG shipping market. While demand for LNG ships is expected to remain strong, LNG vessel deliveries are expected to be ample in FY24-25, with 158 speculative vessels set to be delivered. This is significantly higher than the 34 vessels delivered in 2022 and 2023.

Forecasts. Maintained.

Correspondingly, we maintain our SoP-TP at RM8.09.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) exposure to the booming petroleum tanker market globally due to high demand for long voyages due to the Red Sea conflict, (ii) large recurring earnings base which provides it the ability to pay consistent dividends (3.8% for FY25) and (iii) huge balance sheet which enables the group to bid for more capital intensive FPSO jobs.However, the incoming FPSO Mero 3 (accounting for 8% of our S-P valuation) project’s execution risks remain high particularly when final acceptance is approaching in early 4QFY24. 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) further weakness in the global LNG shipping markets.

Source: Kenanga Research - 26 Aug 2024