MISC’s 1QFY13 core earnings met our estimates as earnings (excluding the liner division) surged 64% y-o-y on narrowing losses from the petroleum and chemical tanker division. However, the q-o-q numbers were weaker given the smaller contribution from its LNG and offshore segment. Management cited the possibility of paying a dividend this year on expectation of an improving outlook. Maintain BUY, with MYR5.88 FV.  

- Petroleum, chemical tanker losses narrow. MISC’s 1QFY13 core earnings of USD117m were within our and consensus estimates, making up about 30% of our FY13 forecast. Y-o-y, its bottomline turned around from a loss of USD32m stemming from the liner segment’s losses last year. Excluding the liner division, MISC’s core earnings surged 64% y-o-y, thanks to the narrower losses from its petroleum and chemical division due to a smaller fleet, as well as higher time charter rates (+1-5% y-o-y) and lower bunker costs (-3.5% y-o-y).  However, earnings could have been far much better had it not been for the 9% y-o-y and 16% q-o-q lower contribution from the LNG segment, due to the commencement of leases for two floating storage units (FSUs) despite revenue recognition. Elsewhere, the group’s offshore earnings were weaker by 9% y-o-y and 22% q-o-q higher amid interest expenses at Gemusut Kakap.

- Key briefing takeaways. i) Improving outlook for petroleum shipping as freight rates have gradually stabilized. With Aframax rates picking up, Management aims to reduce its Aframax fleet further to minimize losses, ii) Gemusut Kakap will start earnings contribution in 2H that may surprise on the upside, iii) no new orders for LNG vessels despite the upcoming new Bintulu capacity and Gladstone projects as Management remains cautious on orders, and would only order when it secures a long term charter LNG contract, and iv) potentially worrying signs of an LNG vessel oversupply due to project delays caused by cost overruns.

- Maintain BUY, with our SOP-based FV unchanged at MYR5.88. The worst is over for MISC and Management has hinted of the possibility of paying dividends as the group’s outlook brightens.

Source: RHB