Review

• MISC Bhd’s 1HFY23 core profit of RM1.2bn (+87.7% YoY) came in within expectations at 48% and 52% of ours and consensus’ full-year forecasts.

• The group declared a second interim dividend of 10sen/share (2QFY22: 7sen/share), bringing 1HFY23 DPS to 17sen (1HFY22: 14sen).

• YTD: 1HFY23 revenue advanced 9.0% YoY driven by higher freight rates in the Petroleum segment, and higher revenue from greater progress of ongoing projects coupled with higher dry-docking and repair activities for Heavy Engineering segment. Core PBT surged 64.2% YoY mainly due to higher margins on freight rate in Petroleum segment and higher construction cost negatively affecting Offshore segment in the 1HFY22. This is despite additional cost provision (estimated to be c.RM375mn) from delay in project schedules leading to losses in the Heavy Engineering segment.

• Gas Assets (USD): 2QFY23 revenue was relatively flat QoQ and YoY but core PBT grew 5.6% QoQ and 13.4% YoY respectively driven by lower vessel operating costs.

• Petroleum (USD): Revenue and core PBT in 2QFY23 was comparable QoQ. Compared with 2QFY22, 2QFY23 revenue increased 3.1% YoY on the back of higher charter rates while core PBT more than tripled YoY due to higher margin on freight rates.

• Offshore (USD): Quarterly revenue dropped 22.6% QoQ mainly attributed to lower project progress of FPSO conversion. Consequently, core PBT declined 15.6% QoQ. 2QFY23 revenue plunged 49.8% YoY driven similarly by lower project progress, while core PBT turned from LBT of USD11mn in 2QFY22 to PBT of USD27mn in 2QFY23 as 2QFY22 was affected by higher construction costs from supply chain disruptions and lockdown in parts of China.

• Marine and Heavy Engineering (USD): 2QFY23 revenue more than doubled QoQ and YoY due to greater progress of ongoing projects. Unfortunately, the group registered core LBT of USD87mn compared with core PBT of USD5mn and USD1mn in 2QFY22 and 1QFY23 respectively on the back of additional costs provisions from revised schedule of ongoing projects.

Key Takeaways From Conference Call

• Mero-3 completion target still on track: As of 2QFY23, Mero-3’s overall completion is 89%, on track to achieve sail away by 1QCY24 and reach its designated offshore site by 2QCY24. The group is still actively pursuing an equity partner for Mero-3. Meanwhile, MISC only plans to submit bids for new FPSO projects after starting to receive cashflow from Mero-3.

• Intension to extend commercial life of LNG vessels: Instead of divesting LNG vessels aged above 20 years as per initially planned, MISC intends to extend their useful life via normal drydocking exercises, believing that the useful life of these vessels may stretch up to 25-30 years. As of now, Puteri Nilam Satu and Puteri Delima Satu are two vessels considered for extension of commercial life.

• Working towards recovery of additional cost provisions: According to management, the Heavy Engineering segment suffered additional cost provisions for 2 ongoing projects due to additional onshore works. We understand from Malaysia Marine and Heavy Engineering Bhd’s (MHB) analyst briefing that the delay was due to mix of operational delay (supply chain disruption and labour shortage) and some additional works requested by clients. MHB is working towards full recovery of costs and expects to receive any recovery by the end of 2023. MHB’s management also alluded that no further provision was expected during the briefing.

Impact

• No changes to our earnings forecasts

Outlook

• Gas Asset: Management believes that the prospect remains positive due to the rebound in LNG demand prompted by lower prices, restocking for winter requirements and depletion of inventories in the summer given the frequent heat waves.

• Petroleum: The increase in tonne-mile demand following Russia’s invasion of Ukraine should continue supporting the earnings for the segment in the coming quarters.

• Offshore: With expected stable growth in upstream capital expenditure moving forward, the FPSO awards should continue to rise. That said, the group’s bid for new project should be after the delivery of Mero-3.

• Marine and Heavy Engineering: The segment’s outlook remains challenging due to inflationary pressure impacting the Heavy Engineering subsegment and stiff competition from Chinese shipyards in the Marine subsegment. Nonetheless, we believe that profitability would improve significantly due to recovery of costs (especially costs incurred due to additional works requested by clients) and expectation that there will be no additional cost provision moving forward.

Valuation

• We roll forward our base year to FY24. Reiterate Buy with a lower TP of RM8.60/share (previous: RM9.10/share) based on 16.5x CY24 EPS.

Source: TA Research - 25 Aug 2023