In need of a catalyst

Core businesses in a protracted rough patch. MISC logged a 25% decline in core earnings in 2016 despite a stronger US dollar to the ringgit, though headline profit was inflated by non- recurring gains. The outlook for its core LNG and petroleum shipping segments is expected to remain soft in 2017 as well, barring currency gains. The group is seeking inorganic growth opportunities especially in the offshore space, though a short- term re-rating catalyst remains a challenge. Maintain HOLD.

Supply growth pressures charter rates and hires. LNG shipping rates continue to be depressed by newbuild supply, and also weaker prospects of new charters or renewals. While new orders for petroleum tankers are thinning out, the strong deliveries in 2016-17 are still expected to delay any inflection points for rates to 2018 and beyond.

Valuation supported as dollar strength proxy. MISC?s functional currency and key assets are denominated in the US dollar, though it reports earnings in ringgit. We have revised our average FY17/18F USDMYR forecasts to 4.62/4.71 from 4.22/4.37. A weaker ringgit presents upside risks to reported earnings and valuations and vice versa.

Valuation

Our SOP-derived TP for MISC is RM8.05, which implies 0.9x FY17-18F P/BV. Given the limited upside, we maintain our HOLD recommendation.

Key Risks to Our View

Severe changes in crude petroleum shipping rates. Our assumptions are for crude shipping rates to decline in 2017. A significant movement in rates due to volatility in crude oil prices will impact earnings.

Source: Alliance Research - 13 Feb 2017