INVESTMENT HIGHLIGHTS

• 1QFY19 normalised earnings broadly within expectations

• Addition of LNG Lerici and LNG Portovenere of vessels propelled the LNG segment

• Better freight rates retained the profitability of the petroleum segment

• Geopolitics and possible extension of output cuts to put pressure petroleum segment

• Earnings forecast unchanged

• Maintain NEUTRAL with a revised TP of RM6.81 per share due to rollover of valuation

1QFY19 results broadly within expectations. MISC Berhad (MISC) reported a normalised PATAMI of RM479.6m (+47.9%yoy) in 1QFY19 which was broadly within ours and consensus’ expectations, accounting for 28.0% and 29.0% of fuel year forecasts, respectively. The higher than +50%yoy jump in finance costs due to the MFRS 16 adoption and cash drawdown for new vessels was offset by better revenue from its energy shipping business (i.e., LNG and petroleum shipping).

Addition of vessels propels LNG segment. The revenue and PBT of the LNG segment in 1QFY19 both increased by +2.6%yoy and +22.4%yoy respectively. The growth in revenue and PBT was mainly attributable to the higher number of operating vessels following the acquisition and leaseback of LNG Lerici and LNG Portovenere on time charter contracts in December 2018 and January 2019 respectively.

Better freight rates retains petroleum segment in the black. Despite the seasonal softness after the winter season, the petroleum segment registered a profit before tax for the second consecutive quarter in 1QFY19 due to higher freight rates compared to 1QFY18. The strength in freight rates was mainly underpinned by slow fleet growth for the quarter under review amidst accelerated scrapping activity last year.

FSO Mekar Bergading cushioned impact from absence of construction revenue. Revenue of the offshore segment was - 12.1%yoy lower in 1QFY19 due to the absence of the construction revenue from FSO Benchamas 2. Nevertheless, the charter commencement of the FSO Mekar Bergading in August 2018 and the contract extension for FPSO Ruby 2 marginally increased the segment’s PBT by +0.9%yoy.

Heavy engineering segment stuck in losses. The heavy engineering segment posted its fifth consecutive quarter of losses in 1QFY19. Weakness in the quarter-under-review mainly came from higher unabsorbed overheads due to: (i) lower dry docking activities under its marine segments and (ii) expected contract awards which have yet to materialise for the heavy engineering business.

Source: MIDF Research - 27 May 2019