Review

• MISC Bhd’s 3QFY23 result came in below our expectation but within consensus forecast. 9MFY23 core profit of RM1.6bn (+15.8% YoY) accounted for 66% and 71% of ours and consensus’ full-year forecasts respectively. The earnings miss was mainly attributed to unexpected loss in the Marine and Heavy Engineering segment from additional cost provisions in 3QFY23.

• The group declared a third interim dividend of 7sen/share (3QFY22: 7sen/share), bringing 9MFY23 DPS to 24sen (9MFY22: 21sen).

• YTD: 9MFY23 revenue advanced 3.1% YoY driven by higher freight rates in the Petroleum segment, and higher revenue from greater progress of ongoing projects for Heavy Engineering segment. Core PBT grew 7.7% YoY mainly due to lower operating expenditure in Petroleum segment and higher construction cost of Mero-3 negatively affecting Offshore segment in the corresponding period last year.

• Gas Assets (USD): 3QFY23 revenue jumped 8.8% QoQ but core PBT dropped 3.9% QoQ likely due to higher operating costs. YoY, the quarterly revenue increased 5.7%, driven by higher charter rate and earnings days following deliveries of 2 LNG carriers in 1QFY23. Core PBT grew 5.8% in tandem with revenue growth.

• Petroleum (USD): 3QFY23 revenue dropped 3.0% QoQ and core PBT dipped 13.3% QoQ likely from higher operating expenses. Meanwhile, quarterly revenue was down 7.8% YoY and core PBT plunged 44.1% YoY as there was a one-off USD54mn compensation with respect to its charter of one Modular Capture Vessel (MCV) Aframax tanker to its client in the corresponding quarter last year.

• Offshore (USD): 3QFY23 revenue surged 29.1% QoQ mainly attributed to higher project progress of FPSO conversion. Core PBT turned from PBT of USD27mn in the immediate preceding quarter to LBT of USD15mn in 3QFY23 on the back of revenue decline and an additional repair cost provision of c.USD20mn relating to an incident involving FSO Benchamas 2 in March 2023.

• Marine and Heavy Engineering (USD): 3QFY23 revenue dropped 41.7% QoQ driven by lower progress of ongoing projects. Fortunately, supported by lower costs provisions from revised schedule of ongoing projects, core LBT narrowed from USD87mn in 2QFY23 to USD22mn in the current quarter. We understand that the cost provision amounts to c.RM30-40mn in 3QFY23 compared with c.RM400mn in 2QFY23.

Key Takeaways

From Conference Call

• Mero-3 completion target still on track: As of 3QFY23, Mero-3’s overall completion is 91.7%, on track to achieve sail away by 1QFY24 and reach its designated offshore site by 2QFY24. Management disclosed that the accounting progress for the project is at 87% while the first cash flow from O&M is expected to be in 4QFY24.

• Possibility of tonnage tax commencing in 2024: In October 2022, Gazette Order was enacted for the extension of 100% shipping tax exemption from Year of Assessment (YA) 2021 to YA 2023 subject to compliance with the minimum substance requirements. From YA 2024 onwards, Malaysia may impose tonnage tax for the shipping industry. Tonnage tax is based on net tonnage of the entire fleet of vessels under operation. According to management, based on experience in other jurisdictions, tonnage tax is usually around 10% of corporate tax. Hence, we can expect the tonnage tax, if implemented, to be around 2.4% for MISC.

• Working towards recovery of additional cost provisions: According to management, the additional repair cost provision of c.USD20mn for offshore segment is claimable by insurance. Meanwhile, MISC’s subsidiary for Heavy Engineering segment MHB is still working towards full recovery of costs. We understand that MHB has made some successful recoveries in 3QFY23, but the amount is not disclosed.

Impact

• We trim our FY23/FY24/FY25 earnings forecasts by 10.0%/0.6%/0.4% respectively to factor in the higher cost provisions for Marine and Heavy Engineering segment.

Outlook

• Gas Asset: The prospect remains positive due to growing LNG demand and expected increase in global liquefaction capacity. We expect the segment’s contribution to be stable in the coming quarter underwritten by long-term charters.

• Petroleum: The segment would continue to face challenges as spot rates are unlikely to pick up in the near term as OPEC is expected to extend the production cuts to support the oil price.

• Offshore: With expected stable growth in upstream capital expenditure moving forward, the FPSO awards would continue to rise. That said, the group’s bid for new project should be after the delivery of Mero-3. The construction contribution from Mero-3 will likely decline in coming quarters as the project reaches the tail end of construction.

• Marine and Heavy Engineering: 4QFY23 outlook would remain challenging due to inflationary pressure impacting the Heavy Engineering subsegment and expected lower dry-docking activities due to high energy shipment demand in the Marine subsegment. Nonetheless, we believe that profitability would improve from recovery of costs (especially costs incurred due to additional works requested by clients) and expectation that there will be little or no additional cost provision moving forward.

Valuation

• We take this opportunity to lower our PE valuation from 16.5x to 15.5x in line with MISC’s 5-year historical forward PE. Maintain Buy albeit at a lower TP of RM8.00/share (previously RM8.60/share) pegged to 15.5x CY24 EPS.

Source: TA Research - 23 Nov 2023