We  expect  MISC’s  2QFY13  earnings  to  improve,  driven  by  surging VLCC  spot  rates  of  late,  stable  Afra m a x   rates,  and  falling  bunker  fuel costs. 2HFY13 outlook remains promising with earnings from Gemusut Kakap kicking in coupled by lower losses from petroleum and chemical shipping. We raise our FY14-FY15 earnings estimates by 13%-20%, with a higher MYR6.40 FV. Maintain BUY. 

- VLCC  rates  rebounds;  Afra m a x   rates  stable.    Very  large  crude carriers  (VLCC)  spot  rates  have  rebounded  strongly  over  the  past  two weeks  to  above  USD22k/day,  the  strongest  since  Dec  2012  (from  YTD average of USD9k/day). This was fueled by spot lifting from the Persian Gulf on strong China demand. The rate spike bodes well for MISC given its 27%  exposure  to spot  rates.  Aframax  rates  in  the  US Gulf  has  been firmly  stable  in  2QFY13  as  discharge  delays  in  some  US  Gulf  ports sparked  a  surge  in  lightering  activities,  which  MISC  has  a  60%  market share in the region. With rates improving sequentially over the past three quarters and MISC having the biggest vessel exposure to Aframaxes (at 55% spot), we expect further reduction in tanker losses. However, MISC thinks the industry remains challenging at least until early 2015.  

- 2Q outlook and beyond. We expect 2QFY13 earnings to improve y-o-y and  q-o-q  as  lower  bunker  fuel  costs  (-8%  y-o-y,  -4%  q-o-q)  lift  LNG earnings. The petroleum & chemical division will see reduced losses as it is  already  EBITDA  positive  thanks  to  the  premium  rates  from  lightering activities.  2HFY13  outlook  remains  promising  with  earnings  from Gemusut  Kakap  kicking  in  coupled  by  higher  tanker  rates  due  to improved  winter  demand.  Over  the  mid-term,  the  pipeline  of  LNG projects (FLNG, Gladstone and Progress Energy) will require at least five LNG  vessels  over  the  next  2-3  years.  Due  to  the  oversupply  of  LNG vessels fueled by the Greeks’ frenzy orders, MISC may purchase these LNG vessels directly at cheaper prices from the open market instead of ordering them from shipbuilders, which would take 1.5-2 years to build.   

- Higher forecasts; maintain BUY. We keep our FY13 estimate but raise FY14-FY15 earnings forecasts by 13%-20%, as we trim our bunker fuel cost assumptions, in line with our view that oil prices will stay at current levels.  Maintain  BUY,  with  our  FV  revised  to  MYR6.43  (from  MYR5.88 previously), as we roll over our SOP valuations to FY14 earnings. 

Source: RHB