INVESTMENT HIGHLIGHTS

• First 9 months of 2017 earnings within expectations

• LNG PBT improved with newbuilds coming on stream

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

• Rebound in offshore segment

• Revised to Trading Buy with adjusted TP of RM7.45

9MFY17 earnings in line. MISC reported 9MFY17 core PATAMI RM1.725b (+22%yoy) which was above both ours and consensus expectations, representing 82% of ours but 80% of consensus’s full year FY17 forecasts. In 3QFY17, MISC recorded a core PATAMI of RM549.9m (+3%qoq and +106%yoy). We view that the net fleet growth to be one of the main catalyst for such performance.

LNG segment 3Q17 PBT increased +55.9%yoy mainly attributable to the commissioning of the third Seri C Class vessel, Seri Cempaka (delivery: end-July 2017) in addition to the other 2 Seri C Class vessels; Seri Camellia (delivery: Oct 2016) and Seri Cenderawasih (delivery: Jan 2017). The commencement of the new Seri C Class vessels helped offset the non-extension of Puteri Intan Satu’s option period. Puteri Intan Satu will instead replace Puteri Firus in a charter swap agreement with Petronas LNG. Meanwhile, Puteri Firus will be used for new redeployment opportunities.

Firmer LNG rates recorded since July as there was a +5%qoq increase in LNG demand due to higher imports from Japan, South Korea and Turkey combined with the shortage of vessels especially in the Atlantic region. We believe that charter rates should hold their ground going into 4Q17 with the onset of the peak winter demand.

Petroleum tanker stuck in the red for 3QFY17 declining by - 33%yoy as the boost provided by the U.S hurricanes was not sufficient to lift the overall charter rates for the quarter. Moving forward, a seasonal pickup in 4Q17 is likely underpinned by colder weather and recovery in refinery activity. MISC is also in a better position to secure higher term charter rates in 4QFY17 as its term to spot mix has fallen to 47:53 from 50:50 a year ago.

Net growth in its Petroleum tanker fleet. MISC delivered 2 modern VLCCs and 2 LR2 tankers on long-term charters with oil major customers, offsetting the demolition of an Aframax tanker (Eagle Columbus). In view of the net addition to its fleet size, MISC is well positioned to cushion a prolonged low charter rate environment.

Rebound in Offshore segment. The segment’s PBT increased by a staggering +212%yoy underpinned by 3 main factors: (i) second adjudication outcome favouring Gemusut Kakap SFPS Ltd (GKL), (ii) higher progress billings for construction works of FSO Benchamas 2 which will be completed in April 2018 and (iii) commencement of its Marginal Mobile Production Unit (MaMPu). Regarding the reversal of provision of doubtful debts in relation to the GKL adjudication, management noted that there will be none in the coming 4QFY17.

Earnings impact. We revise upward our earnings forecast for FY17, FY18 and FY19 by 9.2%. 10.8% and 8.2%, respectively on the back of better-than-expected performance of the offshore segment and incoming vessels.

Trading BUY with a increased TP RM7.45. We revise our call Trading Buy with an increased TP of RM7.45 pegged to 0.9x price-to-net tangible assets which is -1.5 standard deviations. Our call is predicated on: (i)contribution of the 3 Seri C Class vessels; (ii) removal of older tonnages from trade for demolition and iii) FSO Benchamas 2 project progressing ahead of plan.

Source: MIDF Research - 6 Nov 2017