Review

• MISC Bhd’s 1QFY24 results came in within expectations. Core profit grew 1.1% YoY driven by higher earning days for Petroleum segment and greater progress of ongoing projects for Heavy Engineering segment.

• The group declared a first interim dividend of 8sen/share (1QFY23: 7sen/share). This is a positive surprise as the group has kept the 1Q dividend at 7sen/share since FY17.

• Gas Assets (USD): Excluding a disposal gain in 1QFY24, quarterly core PBT increased 7.5% QoQ despite lower earnings days, which we attribute to higher operating expenses including repair costs, voyage costs and bunker costs in the preceding quarter. On a YoY basis, core PBT plunged 20.8% driven by lower earning days from contract expiry and vessel disposals.

• Petroleum (USD): 1QFY24 core PBT dropped 12.7% QoQ due to softer freight rate in line with lower seasonal demand as we exit the winter months. YoY, Core PBT for the quarter jumped 16.9% supported by higher earning days following delivery of VLCC, Eagle Veracruz to Shell in Jan 2024.

• Offshore (USD): 1QFY24 core PBT plunged 75.0% QoQ and 84.4% YoY respectively in tandem with lower project progress in Mero 3 as the project is nearing the end of construction.

• Marine and Heavy Engineering (USD): Core PBT was flat QoQ but doubled YoY on the back of higher revenue from ongoing projects and greater number of vessels secured for ship repair activities.

Key Takeaways From Conference Call

• Mero 3 received provisional acceptance: After sail away from Yantai, China on 24 Feb 2024, Mero 3 has arrived at the field and received provisional acceptance on May 27. This will be followed by hookup and commissioning, which would take around 2 months. First oil is expected in 3Q2024 when the firm period of charter happens. The construction progress currently stands at 94.2% (accounting progress) and will progress towards 100% upon first oil.

• Plan to deconsolidate Mero 3: Recap that MISC funded Mero 3 entirely with internally generated funds. The group is working on disposing off its equity stake in Mero 3. The goal is to deconsolidate Mero 3 to free up free cash flow for the group for future projects. Since the financing costs is not favourable now, the group plans to work on divestment first and will carry out project financing or project bond when the rates are more favourable.

• More Appetite for Stability in Earnings: Compared with peers, majority of MISC’s assets are fixed on longer term charters. The latest term to spot ratio is around 80:20 for LNG vessels and around 92:8 for petroleum shipping. This provides stability to MISC’s earnings and cash flow, hence allowing the group to maintain stable dividend pay-out.

Impact

• No change to our earnings forecasts.

Valuation

• We raise our PE valuation from 15.5x to 16.5x in line with the historical 5- year mean. Following this, we increase our TP to RM8.80/share (previously RM8.30/share) pegged to 16.5x CY25 EPS. Downgrade to Hold.

Source: TA Research - 31 May 2024