• First half 2017 earnings within expectations

• LNG PBT improved with newbuilds coming on stream

• Losses recorded at the petroleum tanker segment due to seasonality factors

• Offshore PBT was lower but cushioned by new projects

• Maintain NEUTRAL with reduced TP of RM7.43

1HFY17 earnings in line. MISC reported 1HFY17 core PATAMI of RM1.175b (+2%yoy) which was met both ours and consensus estimates representing 55% of full year FY17 forecasts. In 2QFY17, MISC recorded core PATAMI of RM530m (-1%yoy and -18%qoq). Earnings declined on a quarterly basis as 2Q-3Q are seasonally softer for energy transportation.

LNG segment 2QFY17 PBT improved +24%yoy driven mainly by the full earnings contribution of 2 of its Seri C Class newbuilds - The Seri Camellia (delivery: Oct 2016) and Seri Cenderawasih (delivery: Jan 2017). The third Seri C Class vessel, the Seri Cempaka was delivered in end-July 2017 which will be followed by the final two vessels scheduled to enter MISC’s LNG fleet by 1HFY18.

Out with the old, in with the new. With newbuilds entering the fray, MISC’s older vessels are being retired, the latest being its 36 year-old Tenaga 3 vessel (last of its class) being fully impaired. The Tenaga 3 will spend its golden years either on short-term charters or be used for conversion.

Petroleum tanker segment fell into the red with lower energy consumption in the summer months, higher refinery maintenance and OPEC production cuts hurting demand. Despite the challenging operating environment, MISC remained busy securing a US$200mUS$275m contract from Statoil ASA for 2 DP Shuttle Tankers in the North Sea which will begin in 2HFY19.

2HFY17 will be kinder to the Petroleum segment. In 3QFY17, MISC will be deploying 2 new LR2 product tankers to TOTAL, as well as 2 new VLCC, both on long term contracts. This is in addition to lower charter costs for its in-charter fleet as vessels are redelivered.

Offshore PBT was lower compared to prior periods following the idling of FSO Abu, as well as MOPU Satu and Dua. Cushioning the lower PBT were variation works for Gumusut-Kakap SFPS Ltd (GKL) amounting to US$6-7m per quarter, progressive billing for the construction of FSO Benchamas 2 and the commencement of its Marginal Mobile Production Unit (MaMPU). Regarding its recent counterclaim by Shell on GKL, management noted that proceedings will be long drawn. Meanwhile, Shell continues to pay MISC for its VO’s on a timely manner.

Maintain NEUTRAL with lower TP of RM7.43 based a 0.9x price-to-NBV. Our downward revision in target price comes amid a change in valuation methodology, from sum-of-parts to 0.9x price-to-net book value (NBV) which is -1.5 standard deviations below its 5-year average amid the challenging overcapacity environment. In our view, the price-to-NBV method better reflects MISC’s fundamentals with assets consisting mainly of vessels and offshore assets tested for impairment regularly. Hence, the carrying value of these assets mirror their fair value, based on second hand prices and current charter rates. Impetus for us to revisit our call on MISC include a change in supply-demand dynamics in the LNG & petroleum transportation market and the securing of sizable projects in the offshore segment.

Source: MIDF Research - 10 Aug 2017