Review

• MISC’s 9M19 core net profit of RM1.1bn (+38% YTD) was within our expectations and consensus’- accounting for 68%/64% of full-year forecasts respectively.

• We expect a bumper 4Q19, largely driven by the petroleum segment due to: (1) seasonally strong freight rates during 4Q winter season, (2) Aframax fleet benefited from a temporal rate surge in Oct-19, (3) delivery of a DP shuttle in 4Q19 that will be chartered out to Equinor, and (4) cost savings from partial disposal of seven A-Class vessels.

• 3Q19 core profit excludes: (1) writeback of Repair & Maintenance provisions recognized in 2018 (progressively) for FPSO Espirito Santo (RM45mn), and (2) impairment/ disposal loss on 7 units of A-Class chemical vessels (USD13.4mn). To recap, for the latter, MISC will sell the vessels to Maersk Tankers. One ship was delivered in 3Q19, whilst the balance will be progressively disposed in 4Q19-1Q20.

• QoQ earnings contraction was broad-based across all segments - with the exception of the Heavy Engineering (HEng) division. In particular, the Petroleum segment was affected by reduced lightering days and blended freight rates. Sequential core PBT loss for the latter expanded to USD7.1mn in 3Q19 (2Q19: USD1.2mn loss). Moving forward, management expects annual net profit accretion of USD5mn p.a. for the Petroleum segment following full disposal of the 7 A-Class vessels.

• YTD earnings expansion was mainly driven by a turnaround in the Petroleum segment on the back of: (1) stronger freight rates, and 2) depreciation and fuel savings from a leaner fleet. Additionally, bottomline was boosted by: 1) LNG: (i) higher fleet utilization from less dry-docking activities, and (ii) enlarged fleet includes 3 newbuilds and 2 acquired units, and 2) HEng: turnaround in Marine segment due to increased conversion works and LNG dry docking services. The above more than cushioned weakness at the Offshore segment due to: (i) demobilization costs, and (ii) reimbursement of towing and installation costs for FSO Mekar Bergading recognized in 3Q18.
   
• The group declared 3rd interim DPS of 7 sen (3Q18: 7 sen). This brings YTD DPS to 21 sen (9M18: 21 sen).

Impact

• Maintain earnings forecasts.

Outlook & Valuation

• We believe petroleum tanker rates are normalizing after a short-term surge in Sept-Oct 2019. To recap, the latter was mainly fuelled by panic on the back of: (1) drone attacks on Saudi Arabian oil facilities, (2) surprise decision by ExxonMobil to stop chartering tankers that have called at Venezuela, (3) fresh attack on an Iranian tanker in the Red Sea at Middle East, (4) tonnage taken off the market for scrubber installations to comply with IMO2020 regulations, and (5) US sanctions on affiliates of Cosco Shipping (fleet: ~100 tankers).

• In the case of (1), charterers rushed to fix VLCCs for loadings from the Middle East. Additionally, Asian buyers diverted to US crude supply to diversify supply risk. However, Aramco’s production has since been restored following the completion of repair works. Although the surge in rates largely benefitted VLCCs, management alluded that it cascaded to Aframaxes as well. Recall that the bulk of earnings for MISC’s petroleum fleet emanate from the Aframax class.

• Maintain Hold on MISC with unchanged target price (TP) of RM8.60 based on 15x CY20 P/E.

Source: TA Research - 14 Nov 2019