INVESTMENT HIGHLIGHTS

• Moderate fleet growth in LNG segment
• Scrapping activities to help petroleum segment
• Contract renewal risks linger in offshore division
• Heavy engineering outlook remains challenging
• Downgrade to NEUTRAL with reduced TP of RM7.36

Marginal net fleet growth. MISC received the delivery of Seri Camar in February 2018, the fourth of the five Seri C Class LNG vessels. This leaves one more vessel for delivery by 1HFY18 which will result in a net fleet growth of only one due to the disposal of Aman Bintulu in 1QFY17. The marginal growth in LNG fleet size may be dampened by the normalisation of Yemen LNG’s deferred income for Seri Balhaf and Seri Balqis.

Sluggish LNG spot rates. We observe that on average, the LNG spot rates in 1Q18 declined by about -5.6% amidst the onset of warmer weather and oversupply of tonnage. This depressed spot rates tremd is expected to persist due to the huge pile-up of new deliveries in 2018. Therefore, earnings of the LNG segment are expected to remain flat as we do not see much upside for earnings in the LNG segment.

Scrapping activities to help petroleum segment. Meanwhile, the petroleum segment is expected to stage a turnaround in 2HFY18 with sustainable oil demand from 2QCY18 as reported by the International Energy Agency, coupled with more scrapping activities and fewer newbuilds. Scrapping activities in petroleum shipping space is expected to increase amidst the current weak tanker market, strong prices for scrap steel and environmental regulations. As a result, petroleum tanker rates could be lifted by such environment. Moreover, higher term-to-spot ratio for its petroleum vessels acts as a sustainability factor for this segment.

Shift in management pattern for chemical fleets. Furthermore, four out of thirteen of its chemical tankers namely; (i) Bunga Lucerne; (ii) Bunga Lily; (iii) Bunga Lavender and; (iv) Bunga Lilac have been placed into a pool management system. The pool management systems works in a way whereby a pool manager acts on behalf of ships to obtain charterers. Moving forward, MISC Berhad may inject more chemical vessels into the tanker pool to leverage on scale and sustainability.

Source: MIDF Research - 23 Apr 2018