We remain positive on MISC’s outlook, as it may continue to achieve double-digit earnings growth ahead on higher profitability from the petroleum division, narrowing chemical shipping segment losses and strengthening USD. Maintain BUY, with a higher MYR11.04 TP (from MYR9.85, 25% upside) as we lift earnings for FY16/FY17 by 5.3%/3.3% after lifting our forex assumptions.

Tanker rates are still strong. Despite dropping to the year’s low recently, tanker rates are sharply bucking up again. Very large crude carrier (VLCC) rates are rising to USD100,000/day – its highest since 2008. Fixtures ahead remain encouraging as we approach the winter season. Aframax rates too have been positive, mostly centred in the Caribbean. This is positive for MISC to boost its average time charters,as some of the existing ones for its VLCCs are nearing expiry. The new rates can be locked in at much higher levels moving forward, given the tight supply of tankers currently. We remain bullish on our outlook for the petroleum tanker front, which is expected to report stronger earnings from 2H onwards. For the chemical shipping wing, rates remain stable as demand and supply dynamics are still balanced. We expect FY15 losses to narrow significantly before it books profits in FY16.

Forecasts. We input our revised USD/MYR forecast, which was recently adjusted up to MYR3.882/MYR4.338/MYR4.300 for FY15/FY16/FY17respectively. As revenue and costs are mostly transacted in USD, we lift our earnings by 5.3%/3.3% for FY16/FY17 respectively. While we do not have FY18’s earnings projections, we believe the full-year net profitcontributions from five new liquefied natural gas (LNG) ships are likely to ensure another strong double-digit earnings growth period for MISC.

Maintain BUY. Following the earnings revision, we now expect MISC’s net profit to grow 19% YoY in FY16 on higher profitability from the petroleum division, coupled with narrowing losses from the chemical shipping segment and the strengthenng USD. Its offshore earnings would continue to remain resilient. Meanwhile, its incoming deliveries and Puteri-class ships’ charter renewals and new vessel deliveries (LNG shipping segment) may lead to some marginal earnings improvements. The upward revision in net profit consequently raises our SOP-derived TP to MYR11.04 (from MYR9.85), which translates into an implied 16.1x FY16F P/E, ie slightly lower than its 5-year average 1-year forward P/E of 16.5x.

Key Highlights Petroleum tanker charter rates remains strong. Despite touching the year’s low recently, tanker rates are bucking up again sharply. VLCC rates have touched as high as USD100,000 per day, its highest level since 2008. Fixtures ahead remain encouraging as we approach the winter season. Aframax rates were positive too, mostly centred in the Caribbean.The outlook for the petroleum tanker segment remains promising. Tonne miles demand remains encouraging, given the low crude oil price environment brought about by excess oil production. This has also enforced the need for tanker storage facilities, which has kept the tightness in tanker availability. In turn, this has shored up charter rates in the petroleum tanker shipping segment. With freight rates on the uptrend and excess crude oil production levels in the market, new vessel orderings have also picked up.

While this may eventually lead to renewed concerns over an oversupply of newbuild vessels coming into the market, industry observers only expect tonnage oversupply to be more evident in the 2H16. Furthermore, they do not expect the tonnage supply to be excessive given the increased capacity discipline that has been put in place by the tanker players. Note that the global orderbook to fleet ratio for crude tankers,although on an uptrend, remains at manageable levels for now. Despite the potential oversupply in orders putting pressure on freight rates in 2016, we expect MISC’s average charter rates to continue to inch up higher. This is given the renewal of its expiring charters that were locked in at lower rate s before the charter rate upcycle. Management remains optimistic on the petroleum tanker segment over the next two years. However, MISC is also mindful of China’s economic woes. If the East Asian giant suffers a hard landing, this would be catastrophic for oil demand. On the chemical shipping front, while demand remains lacklustre, the supply tonnage side seems to have eased. This is because of the lack of new deliveries entering the market, which has resulted in charter rates holding up quite steadily.

LNG earnings to only see marginal improvement in FY16. For its liquefied natural gas (LNG) shipping wing, MISC continues to reiterate that the excessive oversupply is putting pressure on LNG shipping spot rates. However, the company has noted that its charters have already been locked in for the long term , which insulates MISCfrom the depressed spot rate environment. We expect USD-based earnings from LNG shipping to see a marginal improvement in FY16 (+1.6% YoY) on the renewal of its Puteri-class ships coupled with the delivery of two new LNG vessels. Profits are the delivery of three more new LNG newbuilds. Full-year contributions from these fivenew LNG vessels are likely to come in by FY18 and would contribute USD123m in total in additional PBT.

On a side note, at end-September, MISC delivered its first LNG from Petronas’ Gladstone venture in Queensland, Australia, to South Korea on the Seri Bakti LNG vessel. We expect the new upcoming new LNG tanker dliveries to accommodate gas delivery from this venture and its upcoming floating LNG facilities. Fleet expansions. As far as fleet expansions are concerned, other than the incoming novation of its five LNG vessels in FY16-17, MISC is also looking to expand its petroleum tanker fleet. Management said it was considering buying newbuilds over used vessels, given that prices have not changed much over the years. By comparison, second-hand vessel prices have increased due to their immediate availability, given the rally in tanker rates over the years. For now, we only input the five new LNG vessels as MISC’s fleet additions in FY16 and FY17. The company’spetroleum and chemical tanker vessel numbers remain unchanged from where they are now.

Acquisition war chest. MISC had earlier announced the disposal of its tank terminal business – VTTI BV – for USD830m. Targeted for completion by end-Feb 2016, the disposal is likely to bring down MISC’s balance sheet net gearing substantially to 3.8% by end-FY16 (from 16.5%). This sizeable spare cash in hand would be MISC’s future acquisition war chest. We note that the shipping conglomerate is open to acquisition opportunities for distressed assets, citing its view that the outlook in the oil & gas space would be more challenging in 2016 given the prolonged low oil price environment. Potential acquisitions targets would still be in the marine energy domain, and include the likes of: i) petroleum tankers; ii) offshore assets like floating, production, storage and offloading (FPSO) units; and iii) LNG vessels.

Forecasts. We have inputted our revised USD/MYR forecast, which had recently been adjusted up to MYR3.882/MYR4.338/MYR4.30 for FY15/FY16/FY17respectively. As MISC mostly transacts its revenue and costs in USD, our earningsare therefore adjusted higher by 5.3%/3.3% for FY16/FY17 respectively. However, we lower our FY15 earnings by 2.5%, as we had mistakenly assumed that the VTTI disposal (for USD830m) would be done as early as September instead of the targeted completion by Feb 2016. Our numbers are 3%/17%/18% above street estimates for FY15/FY16/FY17 respectively. This is because we reckon that most have yet to factor in stronger USD/MYR assumptions, coupled by the strength in the turnaround of the petroleum and chemical shipping segments moving forward. While we do not have FY18’s earnings projections, we believe the full-year earnings contributions from MISC’s five new LNG vessels are likely to ensure another strong double-digit earnings growth rate for the shipping conglomerate.

Maintain BUY. Following the earnings revision, we now expect MISC to exhibit 19% earnings growth in FY16, driven by higher profitability from the petroleum division. This is coupled with narrowing losses from the company’s chemical shipping segment and the strengthening USD. Its offshore earnings would also continue to remain resilient. Meanwhile, the incoming deliveries and the charter renewals for its Puteri-class vessels, as well as the new tanker deliveries in the LNG shipping segment, are likely to give some marginal improvements in earnings. The upward revision in net profit consequently raises our SOP-derived TP to MYR11.04 (from MYR9.85), which translates into an implied FY16 P/E of 16.1x. This is slightly lower than its 5-year average 1-year forward P/E of 16.5x. We reiterate MISC as RHB’s Top Pick in the overall transportation sector and the FBM KLCI index stocks.