The outlook for petroleum  shipping looks bright.  Maintain NEUTRAL at a higher FV of MYR7.21 (from MYR6.92), with a 5.30% upside. Petroleum tanker  rates  achieved  YTD  (as  at  August)  average  increases  in  the 17-90%  range.  Meanwhile, concerns continue  to centre on the  contract expiry  of  its  five  LNG  vessels,  which  could  see  the  LNG  shipping division booking flattish earnings over the next three years. 

Positive outlook.  The  outlook for petroleum shipping is looking positive as  supply  remains  tight,  notably  on  Aframaxes  and  Very  Large  Crude Carriers  (VLCCs),  where  MISC  stands  to  benefit.  Earlier  this  month, China made a move to break the domestic oil market monopoly when a non-oil  state  company  was  granted  a  crude  oil  import  license  for  an annual quota of up to 200,000 tonnes. India has also been refilling its oil reserves.  This  may  pave  way  for  more  oil  demand,  where  we  have noticed a high demand for shipments out of the Caribbean to Asia, giving a  boost  to  freight  rates.  As  disclosed  in  MISC’s  monthly  industry newsletter, petroleum tanker rates achieved YTD (as at August) average increases  in the 17-90%  range, higher  than our forecast of 20%  in FY14and  12% in FY15. A 10% increase to our  assumptions  would bump up our earnings by 10%/20% in FY14/FY15.

Liquefied  natural  gas  (LNG)  to  remain  flattish.  Recall  that  MISC  is about to see five  of its LNG vessels nearing contract expiry over  2014-2017.  One  contract  has  expired,  and  the  vessel  may  undergorefurbishments to prolong usage life. With spot rates on the downtrend in the near term, the  secured  rates could be at USD48,000/day, which we estimate  to  be  40%  lower  than  its  previous  rates.  We  input  two  more contracts  to expire  in  FY15 and  FY16, as guided by  the management. We estimate that earnings  over  the next  few  years  could be  flattish  at best.  Risk  to  further  earnings  downside  would  be  the  further  delay  in securing  a  charter  contract  renewal.  The  LNG  division  contributes  an estimated earnings of 78% and 70% in FY14F and FY15F.

Maintain NEUTRAL. We nudge  up our FY14 earnings by 7% on higher petroleum tanker earnings but lower our FY15 earnings by some 4% on lower-than-expected  contribution  from  Cendor  and  tank  terminal  side. The latter is due to the lower effective stake following the recent listing of VTTI  Energy  (VTTI  US,  NR).  We  have  also  changed  our  currency  to MYR, as per  its financial statements. Despite the lower  FY15 earnings forecasts,  we  raise  our  SOP  FV  to  MYR7.21  (from  MYR6.92)  as  we reduce our  net debt by 28%. This gives  it  an implied  16.2x  FY15 P/E, near the tanker shipping players’ average of 16.9x FY15 P/E.

Source: RHB