1Q15 earnings were largely in line. Downgrade to NEUTRAL with SOP TP cut to MYR9.49 (from MYR9.56, 4% upside). Disappointments came from the LNG side on two Puteri-class vessels coming off charter and higher dry docking days. Petroleum tankers booked better-than expected earnings on strong rates. We trim FY15F earnings slightly by 2% while FY16F-17F are left unchanged.

• Weaker LNG offset by petroleum tankers’ improved profits. MISC’s MYR566.2m 1Q15 core earnings (YoY: +15.4%, QoQ: +6.3%), after stripping off several one-offs (~MYR79.9m), were within our and consensus estimates (24-26% of FY15F). Liquefied natural gas (LNG)earnings were weaker (YoY: -22.1%, QoQ: -4.1%), noting two Putericlass LNG carriers idled for refurbishment. What particularly disappointed was the effective hiring days on higher dry-docking activities. This was mitigated by higher-than-expected earnings from the petroleum wing on strong tanker rates, notably from its Aframax fleet. The tank terminal division suffered ~USD11m in backdated tax charges that we treat as non-recurring. Even stripping this, overall earnings were weaker than expected. The offshore division earnings (+60.5% YoY) were largely in line, on profits from floating, production, storage and offloading (FPSO) Cendor. It will make its full-year contribution in FY15.
• Briefing highlights. Management seems upbeat on the petroleum tanker wing’s outlook, citing profitability over the ensuing quarters as rates are hovering above breakeven levels. We concur, as spot rates for Aframax/very large crude carriers (VLCCs) have nudged up 54%/90% YTD respectively. With some petroleum tanker charters nearing expiry in FY15, this provides another earnings boost as these will be renewed at more favourable rates. LNG is a near-term concern as three more Putericlass vessels comes off charter in the next two years. Note that the five will be hired progressively come 3Q15 onwards after necessary refurbishments. On the offshore side, oil majors’ capex cuts provedchallenging for new wins. W e have yet to factor this into our earnings. The chemical tanker division remains challenging, on China’s slowdown .
• Cut earnings by 2%, now NEUTRAL (from Buy). We trim earnings from LNG shipping on higher-than-expected dry-docking days, offset by the higher earnings projected for its petroleum tanker wing. All in, FY15Fearnings are reduced by 2% while FY16F-17F are left unchanged. As a consequence of the earnings downgrade, we reduce our SOP-based TP to MYR9.49 (from MYR9.56) with our call downgraded to NEUTRAL.