• FY19 results were higher but missed expectations
• Higher number of operating vessels sustained LNG’s profitability.
• Petroleum segment returns to the black in FY19 due to surge in freight rates in 4QFY19
• 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 revised downwards
• Maintain NEUTRAL with revised TP of RM8.11 per share

FY19 was higher but missed estimates. In 4QFY19, normalised earnings MISC Berhad (MISC) came in at RM409.2m (-16.9%yoy). Notwithstanding this, MISC’s cumulative FY19 normalised earnings amounted to RM1.67b (+11.9%yoy) which was below our expectations at 92.0% but broadly met consensus’ estimates at 94.5%. The negative variance came from the higher-than-expected finance costs which turned out >+20%yoy higher, partially outweighing the gains from the stronger freight rates for petroleum and LNG shipping.

Higher number of operating vessels sustained LNG’s profitability. The revenue and PBT of the LNG segment in FY19 both increased by +7.2%yoy and +23.3%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) additional charter rates for Floating Storage Units as a result of retrofitting works done. Overall, this helped to overcome the impact of lower charter rates especially in 4QFY19 which was lower by more than -30%yoy.

Petroleum segment performs better in FY19. The petroleum shipping segment returned to profit for FY19 after two consecutive years of losses. The main driver for the segment’s performance was the surge in tanker spot rates for all vessel types (VLCC, Suezmax, Aframax) in 4QFY19 to a level not reached since 2016. The time charter rates followed suit but the rate of increase was not as high as spot rates which jumped by more than three times. Overall, this mainly benefited Suezmax and Aframax vessels which has a 26.0% and 56% exposure to the spot market while all MISC’s VLCCs were on time charter contracts. The 4QFY19 spike in tanker rates was underpinned by geopolitical events (attacks on Saudi facilities, U.S sanctions on COSCO vessels) and regulatory factors (IMO 2020 implementation).

How has tanker rates fared so far? So far in 1QFY20, Average spot tanker rates have shown a steep decline of more than 20% since the start of FY20 due to subdued winter season which coincided with the Covid-19 outbreak. We gathered from the management that the exposure of MISC’s petroleum vessels to China is minimal. Nevertheless, if the Covid-10 outbreak extends beyond March 2020, there could be a spillover effect from China’s slowing demand to the global oil market. As such, tanker spot and time charter rates will face further downward pressure in addition to the seasonal lull in 1HFY20.

Source: MIDF Research - 19 Feb 2020