Review

• MISC’s FY16 core net profit of RM2.3bn (-24% YoY) was within our estimates but ahead of consensus estimate, accounting for 105% and 108% of full-year forecasts respectively.

• FY16 headline net profit of RM2.6bn includes the following exceptional items:- 1) net impairment provisions of RM413.4mn, where a chunky sum was derived from MMHE’s yard (USD34mn) and finance lease receivables (USD47mn), 2) net acquisition gain of RM887.3mn, mainly from Gumusut Kakap (GKK)’s remaining stake acquisition (USD207mn) and disposal of MISC’s logistics business (USD17.6mn), 3) provision of charter hire loss (RM200mn), 4) recognition of intangibles (RM47mn), and 5) net forex loss(RM44mn).

• Overall, it was a weak year for the group as earnings were dragged by:- 1) accelerated fleet depreciation to reflect a deteriorating market outlook, 2) depleted heavy engineering orderbook, 3) early termination and suspension of contracts for several vessels (i.e. Seri Balhaf & Balqis at Yemen, and MOPU Satu & Dua), 4) anaemic fleet charter rates arising from fleet oversupply, and 5) suppressed utilization for LNG and chemical fleet. This more than offset positive earnings drivers, including a robust marine business running at full capacity, 7-month contribution from GKK, and delivery of newbuild Seri Camellia LNG carrier in 4Q16.

• The group declared DPS of 20 sen in 4Q16, resulting in total FY16 payout of 30 sen. This is in-line with expectations, and similar to FY15’s payout.

Key Takeaways from Conference Call

• LNG: 1) There are currently 4 vessels which are not locked into term charters. They include:
  
  1) Aman Hakata and Bintulu (but which received early termination fees), and 2) Seri Bakti and Anggun which are currently deployed for spot charters.
  
  2) Vessels with expiring contracts in 2017 include:- 1) Puteri Firus, which will be deployed for a new 10-year contract after refurbishment, and 2) Puteri Intan Satu, which will renegotiate for a 5-year extension option.
  
  3) Seri Bakti has secured a short term time charter with Koch Shipping that will commence in end-1Q17.
  
  4) For 2017, Seri Balhaf and Balqis will now recognize revenue at its original contract charter rates. To recap, both vessels suspended operations due to civil unrest at Yemen. As a result, in 2H16, both vessels accrued revenue at a lower laid-up rate. Therefore, the difference arising from original and laid-up rates in 2H16 will now be recognized in 2017 instead. This is in addition to normal revenue in 2017.
  
  5) There is a possibility that management will recognize pre-emptive provisions to account for any slight adjustments or deviations for Seri Balhaf & Balqis. Nevertheless, at this juncture, MISC is confident that endclient, Total Energy, will not exercise force majeure and renege on agreed contract payments.
  
  6) 4Q16 drawdown of debt facilities amounting to USD300mn-400mn was to fund capex for newbuilds. Nevertheless, the group’s financials remain healthy, with net gearing of 0.2x. Management reiterated its appetite for M&As on the back of its underleveraged balance sheet.
   
• Petroleum: 1) Term: Spot charter is now at 43: 57 (3Q16: 50:50). To recap, term charters typically comprise >50% of fleet contracts. However, it is higher now due to inclusion of the chemical fleet and lower lightering activities. 2) At any given time, 4-8 charter contracts are reviewed on rolling basis.
• Offshore: 1) MOPU Satu & Dua, and FSO Abu were demobilized in 4Q16, 2) Management expects to complete the conversion of Bunga Kelana 5 for the FSO Benchamas 2 project in approximately 12 months. This is in-line with MISC’s target to commence this project by early 2018.

Impact

• We incorporate FY16 unaudited figures and introduce FY19F earnings into our forecasts. In addition, other major changes include:- 1) lowering FY17 utilization for Puteri Firus due to idle period during refurbishment, 2) tweaking Seri Bakti’s utilization upwards on the back of its new short term contract, 3) increasing minority interest and interest costs, and 4) incorporating our revised forecasts for MMHE. As a result, our FY17/18 estimates are reduced by 15%/17%.

Valuation

• Following the downgrade in our forecasts, our TP for MISC is revised to RM6.94 (previous: RM8.16) based on unchanged 14x CY17 P/E. Maintain Sell.

• We expect subdued earnings in the near-to-medium term due to a weak market across all fleet segments, and also for offshore fabrication. Management shares the same sentiment, with expectations that the inflexion point in petroleum tanker rates will only happen in 2018. Whereas LNG rates for this year are expected to be further suppressed by the deferral of 2016 deliveries to 2017.

• Potential medium term earnings catalysts include:- 1) value accretive M&As, 2) award of a sizeable FPSO contract from Petrobras Brazil exceeding USD1bn, and 3) Aman Bintulu & Hakata and MOPU Satu & Dua secure new contracts – which are not factored into our forecasts.

Source: TA Research - 13 Feb 2017