INVESTMENT HIGHLIGHTS

• 1QFY18 earnings below estimates
• Long term contracts to sustain LNG segment
• Petroleum segment to remain weak
• Contract renewal risks linger in offshore division
• Challenging outlook for heavy engineering
• Maintain NEUTRAL with reduced TP of RM7.14 per share

1QFY18 results below expectations. MISC reported a normalised PATAMI of approximately RM331.6m in 1QFY18 which was -62.3%yoy lower and was below our and consensus estimates by a variance of more than 5%.

Lower number of operating LNG vessels. The revenue and PBT of the LNG segment in 1QFY18 both declined by -11.3%yoy and - 7.4%yoy respectively. The decline in revenue and PBT is mainly attributable to the lower number of operating vessel and lower charter rates locked in for Puteri Firus back in October 2017.

Resilient LNG time charter rates. Most LNG vessels of MISC operate on long term charter contracts which have been quite resilient and higher compared to spot charter rates for most of the time. Meanwhile on average, the LNG spot rates in 1Q18 declined by about - 5.6% amid onset of warmer weather and oversupply of tonnage. This trend low spot rates is expected to persist due to the huge pile-up of new deliveries in 2018. With the delivery of Seri Camar and Seri Cemara in 1HFY18 that operate on long term contracts, this could further support the growth in earnings in addition to the extension of time charter contracts for Seri Bakti and Seri Anggun.

Petroleum segment remains in the red. The petroleum segment registered a loss before tax for the fourth consecutive quarter as charter rates secured were much lower than expected amid tonnage oversupply. Management guided that the segment to perform weaker than the year before. Nonetheless, the pickup in scrapping activities in the environment of slow crude tanker growth bodes well for freight rates in the long term. Moreover, higher term to spot ratio of 55:45 compared to 53:47 in 1QFY17 for its petroleum vessels acts as a sustainability factor for the segment.

Source: MIDF Research - 15 May 2018