AmWatch - MISC : Earnings delivery on track from petroleum shipping BUY

STOCK FOCUS OF THE DAY

MISC : Earnings delivery on track from petroleum shipping           BUY

We reiterate our BUY recommendation on MISC with a higher fair value of RM10.30/share (from RM10.10/share), based on our sum-of-parts valuation.  We have raised our FY15F-17F earnings by 5%-10% after raising our assumptions for the petroleum rate. MISC’s 9MFY15 core net profit of RM1,997mil came in above expectations, accounting for 83% of our full year estimate and 81% of consensus’. This excludes, among others, a one-off net impairment provision related to the Puteri class LNG vessels that went on charter renewal with Petronas. The group registered a 9MFY15 core net profit growth of 51% YoY, mainly due to the continued strength of the petroleum shipping rates, which saw the segment achieve a pretax profit of ~RM315mil compared to a loss of ~RM92mil in the previous year, as well as contributions from FPSO Cendor that was delivered in September 2014. However, this was partially offset by lower earnings from its LNG segment (-23% YoY) due to the expiry of three Puteri class LNG vessels, as well as the dry-docking of several existing vessels.

The LNG segment’s earnings will remain weak in the coming quarters with two more Puteri class vessels being due for refurbishments. Renewal of these vessels with Petronas will also be at lower rates, given that current spot rates remain under pressure due to the rise of global fleet supply. Nevertheless, this would be partially offset by five newbuild vessels chartered to Petronas starting next year. The group remains confident that charter rates for petroleum tankers will continue to hold up.  This is because the rate of supply of new tankers peaked in 2014, with no signs of heavy ordering currently. Additionally, demand is also expected to remain strong on the back of continued production by the OPEC and the US, and new oil supply entering the market from Russia and Iran. Management expects freight rates to be sustainable at the current levels for the next 2 years.

MMHE’s earnings were hit due to the completion of most projects and additional cost provisions being made for the Malikai TLP project, where compensations are currently being pursued. We expect the outlook for the division to remain challenging in the near term. Order book replenishment is still a concern as some major projects have been deferred yet again. The stock now trades at an FY16F PE of 17x.

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