MISC - Stable Earnings Profile; Reiterate BUY

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+1.06 (14.89%)
  • Reiterate BUY, with new MYR8.18 TP from MYR8.43, 12% upside and c.5% yield. MISC’s 1Q23 results came in with no surprises as core earnings surged 57% YoY thanks to stronger tanker rates and better offshore division in the absence of Mero 3’s cost provisions. We continue to like the company for its steady operating cash flow with the anticipation of a bump-up from Mero 3 starting mid-2024 and its undemanding valuation of 14x FY24F P/E (below -1SD from its 5-year mean).
  • 1Q23 core earnings of MYR585m (+57% YoY) came in within expectations, at 28% and 26% of our and Street full-year estimates. A first DPS of 7 sen was declared (1Q22: 7 sen), as expected.
  • Results review. MISC recorded core profit of MYR585m in 1Q23 (+57% YoY; -24% QoQ) after stripping off USD12m in Mero 3 construction gains, USD13m one-off gain from the Vietnamese offshore asset contract extension and MYR96m in vessel impairments. The weaker QoQ performance was due to lower profit from its petroleum division which, in turn, was dragged by lower tanker rates and LNG profit. 1Q23 core earnings surged by 57% YoY, on the stronger numbers from the petroleum and offshore divisions in the absence of the Mero 3 project’s cost provision recognised in 1Q23. This has masked a weaker contribution from the LNG unit (-2%, lower earnings days).
  • Outlook. The Mero 3 project was at 85% physical completion as of 1Q23, and is on track for delivery in May 2024. The term-to-spot ratio within the petroleum division increased to 84:16 in 1Q23 from 77:23 in 4Q22, as more Aframax vessels were put on term charters. With more vessels on term charters, we expect the petroleum division to deliver relatively more stable earnings. Two LNG vessels were delivered in January this year, with another 25%-owned 12 LNG vessels to be delivered in 2025-2026. On the other hand, one LNG vessel contract has expired in 1Q23 with another two and three vessels due for expiry in 2H23 and 2024. MISC will be considering various options including contract extension, re-deployment opportunities, among others, before scrapping these vessels.
  • We keep our earnings estimates but our SOP-based TP is cut slightly to MYR8.18 after rolling forward our valuation base year to FY24F, with a 4% ESG discount based on the revised ESG score of 2.8 (from 3.0). MISC’s balance sheet remains solid, with its net gearing still maintained at 0.31x as of 1Q23. Downside risks: Weaker-than-expected petroleum tanker rates, and unexpected contract cancellations of long-term contracts.
  • ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 25 May 2023

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