(Maintain HOLD, TP: RM5.73)

We came back from MISC company visit feeling less sanguine about prospects over the medium term but positive over the long run. MISC excitement in the long run is expected to come from the LNG transportation business via its parent Petronas' JV with Progress Energy to explore and develop production of large natural gas (LNG) of which MISC is expected to be the shipper. However, over the medium-term, the petroleum and chemical tanker market is in a tough operating environment hit by depressed charter rates due to oversupply of vessels and stubbornly high bunker cost. We maintain HOLD with a RM5.73 target price based on 1.2 P/B (multiple is below its historical average).

Prospects

• Quantum leap in LNG transportation earnings over the longer term. The long term prospect in this division seems bright as the LNG segment is set for a boom driven by the joint venture (JV) between Progress Energy and Petronas to develop natural gas production and LNG export facility. However, the first shipment of gas from the proposed LNG export facility is only expected in late 2017. Assuming transportation of 223MT of shale gas (which is way below the recoverable estimates but equivalent to 10 times MISC’s current shipment of 22.3MT), the LNG division alone is expected to record a whopping RM14bn at the operating pre-tax profit level.
• Boost in FY13 earnings from exodus of liner business. We expect the Group’s earnings to be boosted upon its exit from the liner business which has been a thorn in the Group’s earnings over the past several quarters. This division has been incurring losses of >RM400m p.a. over the last three years. The liner business is expected to cease operations by 30 Jun 2012. Thereafter MISC is looking for buyer for the liner vessels assets is expected help improve MISC cashflow. The liner vessels sitting in MISC’s books as at 31 Mar 2011 is RM970m. Assuming the sale is concluded at 20% discount to the vessels book value as at 31 Mar 2011 which implies RM776m or 17 sen/MISC share.
• Petroleum tanker may drag down positive the prospects in LNG and liner… We expect this division to continue making losses over the next subsequent quarters from the oversupply of vessels which outstrips demand growth and high bunker rates. As an indication, there are >100 oil tanker vessels expected to be delivered between 2012 and 2014. Based on Clarkson Research Services, the world’s largest  shipbroker, global fleet for VLCCs is expected to increase by 7% in 2012 to 187m DWT vis-a-vis a 3% growth in demand to 152m DWT.
• …and chemical division losses to narrow but unlikely to be back in the black. We expect this division’s losses to narrow going forward due to improving vessels supply demand fundamentals emanating from a low order book and supported by stable demand for vegetable oil. However, this division is unlikely to turn around into the black over the medium term. This is simply due to the double whammy of high bunker cost and MISC having to face the prospect of transporting half-filled cargoes on their return trip which is less cost effective.

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