INVESTMENT HIGHLIGHTS

• First quarter earnings within expectations

• The performance of MISC’s core businesses were mixed

• Outlook stable for the rest of 2017

• Maintain NEUTRAL with reduced TP of RM7.90

First quarter earnings within expectations. MISC reported 1QFY17 core PATAMI of RM540m (-13%yoy) which met both ours and consensus estimates representing 26% of full year FY16 forecasts.

Exceptional items. We excluded several items in deriving our core numbers: 1) Gain of RM289m - adjudication claim for Gumusut-Kakap (GKL) variation order, 2) Gain of RM31m - for disposal of Aman Bintulu LNG vessel, 3) Gain of RM45m - FSO Cendor revision of charter rates and 4) Loss of RM228m - further impairments on MOPU receivables.

The performance of MISC’s core businesses were mixed:

1) LNG segment PBT improved +24%yoy driven mainly by the delivery of two newbuilds - The Seri Camellia (delivery: Oct 2016) and Seri Cenderawasih (delivery: Jan 2017) which translated into an increase in effective LNG tonnage by +8% over FY16.

2) Petroleum tanker PBT fell -69%yoy due to lower petroleum tanker rates resulting from OPEC production cuts which resulted in lower tonne mile demand for tankers in the Middle East. Meanwhile, significantly higher bunker fuel prices did not help.

3) Offshore PBT rose +22%yoy following the full consolidation of GKL and progress claims for the conversion of FSO Benchamas 2.

Stable outlook for 2017. For the LNG segment, MISC will be taking delivery of its third Seri C Class LNG vessel at the end of the third quarter. Hence, contributions will only be seen from 4QFY17 onwards. Balancing some of these gains would be the dry docking of Puteri Intan Satu for refurbishment at end-3QFY17 and the Puteri Firus commencing its option extension which are at lower rates.

For the Petroleum tanker segment, MISC will be taking delivery of two LR2 vessels while lower costs from 4 fewer in-chartered vessels would help cushion continued softness in charter rates.

Maintain NEUTRAL with unchanged TP of RM7.90 based on sum-of-parts valuation. Our NEUTRAL call is premised on the oversupply of tonnage in both the LNG and petroleum segments which exerts pressure on charter rates. Impetus for us to revisit our call on MISC include 1) a drastic change in supply-demand dynamics occur driving the LNG or petroleum transportation market closer to equilibrium, 2) the securing of sizable projects in the offshore segment and 3) earnings accretive acquisitions utilising its cash pile of RM1.3b.

Source: MIDF Research - 5 May 2017