• 9MFY19 results broadly within expectations

• Lower dry docking days maintained LNG’s profitability.

• Better tanker spot and time charter rates as refineries resume purchases

• Offshore contract extensions cushion impact of provision for demobilization cost of FSO Angsi

• Heavy engineering stuck in losses albeit at a lower level

• Earnings estimates unchanged

• Maintain NEUTRAL with unchanged TP of RM8.35 per share

Broadly within expectations. In 3QFY19, normalised earnings MISC Berhad (MISC) rose by +3.9%yoy to RM326.4m. This brings MISC’s 9MFY19 normalised earnings to RM1,263.4m (+24.3%yoy) which broadly met ours and consensus’ full year estimates at 70.0%. Nevertheless, we opine that it will be a strong 4QFY19 due to; (i) temporary surge in freight rates; and (ii) winter season.

Higher number of operating vessels maintained LNG’s profitability. The revenue and PBT of the LNG segment in 9MFY19 both increased by +4.5%yoy and +13.7%yoy respectively. The growth in revenue and PBT was mainly attributable to the higher number of operating vessels following: (i) the acquisition and leaseback of LNG Lerici and LNG Portovenere on time charter contracts in December 2018 and January 2019 respectively; and (ii) full nine months contribution from Seri C class vessels; Seri Camar and Seri Cemara delivered in March 2018 and May 2018 respectively. Moreover, we gathered that number of dry docking days averaged around 125 days in the period under review compared to 200 days a year ago.

Improved performance for petroleum segment. Losses before tax for the petroleum segment in 9MFY19 declined by -95%yoy. The decline in losses was supported by lower depreciation and bunker costs following lower number of operating vessels in addition to better spot and time charter rates especially for the VLCC class, translating to better vessel utilisation, with refineries appear to have resumed purchases after a longer than usual shutdown period. Meanwhile, the term to spot ratio for petroleum segment as of 30 September 2019 stood at 60:40 compared to 65:35 in the previous quarter. This enabled MISC to capture the benefits from the surge in spot tanker rates seen in late September 2019 due to geopolitical factors. Notwithstanding this, spot tanker rates have declined from USD300,000 per day in mid-October to reach November 2018 levels of circa USD55,000 per day. Therefore benefits from MISC’s increased exposure in the spot market will be limited in 4QFY19.

Reducing reliance on chemical business. MISC has delivered one Aclass chemical vessels to Maersk Tankers in 3QFY19 with six more remaining to be transferred by 1QFY20. The move to dispose its chemical tankers signifies MISC’s preparedness to venture into other non-conventional businesses. That said, the net gain on disposal for the seven chemical vessels only amounts to approximately RM21m, immaterial to MISC’s overall earnings.

Offshore contract extensions cushioned impact of provision for demobilisation cost. Revenue and PBT of the offshore segment in 9MFY19 was lower by -17.4%yoy and -20.1%yoy respectively due to the recognition of the demobilisation cost for FSO Angsi in the period. Nevertheless, the charter commencement of the FSO Mekar Bergading in August 2018 and the contract extension for FPSO Ruby 2 and FPSO Bunga Kertas to early FY20 cushioned the segment’s losses.

Source: MIDF Research - 14 Nov 2019