MISC's 1QFY24 results beat expectations. Its 1QFY24 core net profit rose 28% YoY due to stronger-than-expected petroleum tanker freight rates. The petroleum tanker market will remain firm in the near term but incoming supply might limit further upside.  We raise our FY24-25F net profit forecasts by 11% and 5%, respectively, lift our TP by 5% to RM8.09 (from RM7.69) but maintain our MARKET PERFORM call.

Its 1QFY24 core profit of RM696.7m (excluding an EI of RM74m gain from ship disposal and RM12.6m impairment loss on receivables) beat expectations, coming in at 33% and 30% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from high-than-expected petroleum tanker freight rates. It declared an interim DPS of 8 sen, on track to meet our full-year forecast of 30 sen.

YoY, its 1QFY24 revenue rose 18% due to stronger petroleum tanker rates and higher revenue recognition from the marine and heavy engineering division. Its core net profit improved by a steeper 28% as higher freight rates filtered down almost entirely to the bottom line (while operating cost remained relatively stables), partially offset by weaker JV contributions.

QoQ, its topline declined by 15% due to weaker performance in the gas and asset solutions division, attributed to fewer vessel earning days and reduced offshore business revenue, primarily from lower FPSO conversion revenue. Its core profit only declined by 7% due to lower cost.

Briefing highlights. The key takeaways from MISC’s analysts briefing are as follows:

1. The gas and asset solutions division is expected to remain stable in FY24 and gradually grow as more contracted LNG vessels start contributing from FY25F onwards. However, the spot market for LNG remains tepid due to the heavy pipeline of new vessels entering the market. Consequently, the potential rates for new vessels remain unexciting.

2. It believes the petroleum tanker market will remain firm due to growing long-haul demand as ships avoid the hot spots of geopolitical tensions. However, the order book for newbuild tankers will increase YoY in FY24 as ship owners place more orders, potentially limiting further significant upside to the spot tanker rates.

3. The Mero 3 project achieved a physical completion of 94.2% as at end-1QFY24 and sailed away on 24 Feb 2024. The asset will achieve 100% completion after hook up and commissioning is completed and the final acceptance is secured from the client.

Forecasts. We raise our FY24-25F earnings forecasts by 11% and 5%, respectively, after lifting our petroleum tanker rate assumptions to USD34,000/day and USD35,000/day (from USD31,000/day and USD34,000/day).

Valuations. We raise our SoP-TP by 5% to RM8.09 (from RM7.69) as we assume higher petroleum tanker market values in view of the stronger petroleum market outlook. There is no change to our valuation based on ESG given a 4-star ESG rating as appraised by us (see Page 5).

Investment case. We like MISC due to: (i) its recent fleet expansion and modernization, (ii) success in securing mega FPSO projects (i.e. Mero-3) and new contracts from international clients, and (iii) margin expansion coupled with improved earnings visibility following diversification to less commoditized specialised vessels (e.g. DP Shuttles, VLECs). However, the petroleum tanker market could be nearing its short-term peak, as the additional demand from changing shipping behaviours due to geopolitical tensions has largely been priced in. 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) production cuts by major oil producers.

Source: Kenanga Research - 31 May 2024