1HFY14 core profit was on track, thanks to improved hiring days of LNG fleet, lower tanker losses  and  contributions  from  Gemusut Kakap. FPS Cendor  and  the  turnaround  of  its  petroleum  tanker  division  in  FY15 could  be  MISC’s  earnings  driver  moving  forward.  We  trim  earningsforecasts  by  4%/9%  in  FY14/FY15  on  lower  engineering  contributions. Maintain NEUTRAL at a slightly higher FV of MYR6.92 (from MYR6.79).

On track. 1HFY14 core net profit of USD253m improved by 32.8% y-o-y despite  the  lower  topline  (-2.5%)  from  the  disposal  of  six  chemical tankers and lower job recognition from its en gineering division.  MISC’s overall  profitability  improved  due  to:  i)  improved  hiring  days  of  itsliquefied  natural  gas  (LNG)  vessels,  ii)  higher  freight  rates  for  its petroleum  tankers,  and  iii)  higher  associate  and  JV  contributions  from the  Gemusut  Kakap  Semi-Floating  Production  System  (FPS).  1HFY14 earnings accounted for 45% of our full year forecasts,  and we deem this to be within expectations. It also declared a 4 sen interim DPS.

Key briefing takeaways.  MISC’s  petroleum division  returned  to lossesin  2Q  as  rates  were  seasonally  weaker  q-o-q,  although  losses  havenarrowed  as  rates  improved  y-o-y.  We  expect  the  division  to  be profitable in FY15  on the back of higher Aframaxes rates, noting that the vessel oversupply  of Aframaxes  globally  has  eased substantially to precrisis  level.  Management  expects  MISC’s  FPS  Cendor  to  commenceoperations some  time by mid-3QFY14, which could  also be a driver to earnings  next  year.  The  recent  listing  of  VTTI’s  (VTTI  US,  NR)  limited partnership  could  also  see  MISC  booking  an  asset  disposal  gain  in 3QFY14, although the amount has not been disclosed. The listing shouldsubsequently cause MISC’s JV share to book in only 64% of earnings of the tank terminal assets held by the partnership   (from 100% previously). Negotiations  for  charter  renewals  for  its  expiring  LNG  vessel  contracts
remain ongoing.  

Forecasts  trimmed  by  4%/9%  for  FY14/FY15  given  yesterday’s earnings cut  of  its heavy engineering division (click here for report). W e also  see lower profit contribution from the tank terminal division due to the  listing  of  VTTI,  as  well  as  higher  losses  from  the  ailing  chemical tanker  segment,  which  we  expect  to  see  continued  losses  into  FY15 instead of a profit forecast previously.

Maintain  NEUTRAL  with  our  SOP  FV  nudged  up  to  MYR6.92  (from MYR6.79)  after  pegging  it  to  FY15  earnings.  Concern  centers  on  the expiry of its five LNG vessels’ contract amidst low LNG freight rates.  

Source: RHB