MISC’s 9MFY23 results disappointed on weaker-than-expected recovery in its petroleum shipping and offshore earnings. Its outlook remains subdued on softening petroleum tanker freight rates while offshore costs sustained its uptrend. We cut our FY23F and FY24F earnings by 19% and 10%, respectively, reduce our TP by 8% to RM7.00 (from RM7.62) but maintain our MARKET PERFORM call.

Below expectations. Its 9MFY23 core net profit (excluding RM98.8m impairment loss on receivables, RM19.1m derivative loss, RM6.6m net forex loss, RM64.5m JV accrual reversal, RM90m offshore one off, and RM84m Mero 3 EPCIC profit) disappointed at only 58% and 67% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from weaker-than-expected showing from the petroleum shipping and offshore segments. DPS of 7.0 sen was declared, slightly below our expectation.

Slight growth in top line. YoY, its 9MFY23 revenue improved 3.1% underpinned by higher contribution from marine & heavy engineering division (due to work order being ramped up) and slightly higher petroleum shipping revenue due to higher earning days (largely in 1HFY23). However, its core profit surged 33.4% after attributing a significant portion of losses at the marine & heavy engineering division to its minority shareholders.

QoQ improvement driven by lower costs. MISC’s topline weakened 5.2% QoQ as heavy engineering revenue declined due to lower work progress on fabrication works. This was being partially offset by stronger gas & asset solution revenue due to new vessel contribution. However, its core net profit improved 15.3% due to: (i) lower input costs, (ii) stronger gas & asset solution division PBT, and (iii) lower QoQ losses from marine & heavy engineering division. Petroleum shipping and offshore divisions both posted decline in PBT partially offsetting the positive impact.

Briefing highlights. Key takeaways from MISC’s analyst briefing include the following:

1. Petroleum shipping division has secured the majority of its charter in term contract with term-to-spot ratio at 85:15 in 3QFY23, indicating to us that the majority of its charter on its fleet are still at higher rates. Nevertheless, petroleum tanker spot rates have eased recently with VLCC rates at USD30,000/day compared to USD40,000/day in 3QFY23. Hence, if the trend sustains, petroleum division would be slightly weaker in FY24 onwards when part of the fleet goes through charter renewal.

2. Gas & asset solution division would still be the group’s anchor growth driver with 10 LNG vessels to be delivered in FY25 (2 LNGC for Sea River & 8 LNGC for Qatar Energy). Spot market for LNG globally remains robust with rates at c.USD100,000/day level. Structurally, LNG shipping demand would still be on an uptrend given that there is ample global liquefaction capacity (which results in demand for ships) in 2024.

3. One-off offshore cost of RM90m incurred in the quarter was largely due to an existing offshore asset incident and the issue has been resolved. Hence, we believe offshore performance would gradually improve in the coming quarters albeit cost pressures remaining for the division.

Forecasts. We cut our FY23F and FY24F earnings by 19% and 10%, respectively, to reflect lower DCR assumptions for the petroleum shipping division and slightly higher costs for the offshore segment. 

Correspondingly, we cut our SoP-TP by 8% to RM7.00 (from RM7.62) as we assume a lower PBV of 0.8x (from 0.9x) for the petroleum shipping division and earnings downgrade at the offshore segment. There is no change to our valuation based on ESG given a 4-star ESG rating as appraised by us (see Page 5).

We like MISC due for: (i) its recent fleet expansion and modernization, (ii) its success in securing mega FPSO projects (i.e. Mero-3) and new contracts from international clients, (iii) its decent dividend yield, and (iv) the long-term growth trend in LNG business due to structural increase in demand. However, demand for petroleum tankers seems to have peaked with charter rates peaking in 2QFY23 while concerns on Mero 3 conversion costs still persist. Maintain MARKET PERFORM.

Risks to our call include: (i) lower-than-expected utilisation and spot rates for petroleum fleet, (ii) additional cost overruns and project delays for Mero-3, and (iii) further production cuts by major oil producers.

Source: Kenanga Research - 23 Nov 2023