INVESTMENT HIGHLIGHTS

• Higher finance cost led to lower FY18 earnings of RM1.5b (-44.4%yoy), in-line with our expectation

• Better demand of seaborne LNG in 2019 to propel LNG shipping rates

• Expecting a recovery in the offshore segment with the charter of FSO Mekar Bergading and FSO Benchamas 2

• However, near-term outlook for the heavy engineering segment remains challenging

• Maintain NEUTRAL with revised TP of RM6.93 per share

4QFY18 impacted by higher finance costs. MISC’s 4QFY18 normalised earnings came in at RM492.3m, a decrease of -12.9%yoy. The decline was mainly due to finance costs which rose by +60.0%yoy following the interest recognised from the drawdown of the three Seri C class vessels received this year.

….but full year FY18 financial performance still exceeded expectations. Due to weaker 4QFY18 results, full year FY18 normalised earnings amounted to RM1.51b. This translates into a contraction of -44.4%yoy. Nonetheless, MISC’s FY18 financial performance exceeded both ours and consensus expectations with a variance of >5%.

LNG segment’s PBT supported by lower dry docking days. Despite LNG rates surging in 4QFY18 amidst winter demand, revenue of the LNG segment declined by -16.7%yoy due to the negotiation with Yemen LNG to suspend charter contracts for Seri Balhaf and Seri Balqis. As such, no deferred income was realised in 4QFY18 but MISC will be allowed to trade these two vessels at the spot market after receiving it back from Yemen LNG in July 2019. On the PBT level, the segment reversed out its losses before tax recorded in 4QFY17 mainly due to dry-docking days.

Freight rates brings petroleum segment into the black. The petroleum segment recorded its PBT after six quarter of losses before tax as spot rates surged to levels not seen since 4QFY16. Freight rates were buttressed by accelerated scrapping activity which reached a 10- year high in FY18.

Source: MIDF Research - 25 Feb 2019