This article first appeared in The Edge Financial Daily on April 24, 2018

MISC Bhd
(April 23, RM7.08)
Downgrade to neutral with a lower target price (TP) of RM7.36: MISC Bhd received the delivery of Seri Camar in February 2018, the fourth of the five Seri C Class liquefied natural gas (LNG) vessels. This leaves one more vessel for delivery by the first half of financial year 2018 (1HFY18), which will result in a net fleet growth of only one due to the disposal of Aman Bintulu in first quarter (1Q) of FY17. The marginal growth in LNG fleet size may be dampened by the normalisation of Yemen LNG’s deferred income for Seri Balhaf and Seri Balqis.

Meanwhile, the petroleum segment is expected to stage a turnaround in 2HFY18 with sustainable oil demand from 2Q of 2018 as reported by the International Energy Agency, coupled with more scrapping activities and fewer new builds. Scrapping activities in petroleum shipping space is expected to increase amidst the current weak tanker market, strong prices for scrap steel and environmental regulations. As a result, petroleum tanker rates could be lifted by such environment. Moreover, the higher term-to-spot ratio for its petroleum vessels acts as a sustainability factor for this segment.

Under this segment, the floating storage and offloading vessel (FSO) Benchamas 2 will commence operations from 2QFY18, marking the company’s venture into Thailand’s offshore oil and gas sector. Meanwhile, FSO Puteri Dulang was awarded with a three-year extension until 2021, and there is floating production storage and offloading vessel (FPSO) Cendor’s change in contract period from 10 firm years with four one-year extension options to 12 firm years with two one-year extension options effective from Jan 1, 2017. Notwithstanding this, other existing offshore contracts that are expiring in FY18 and FY19 such as FSO Angsi, FSO Orkid, FPSO Ruby 2 and FPSO Bunga Kertas are in the midst of renegotiations. Hence, this represents a contract renewal risk which may outweigh the impact from the new FSO and extension as overall earnings in the segment may decline amid the recognition of the finance lease.

Outlook for the heavy engineering business appears challenging with order-book replenishment remaining challenging as new contract roll-outs are limited. Overall segment contribution is less than 10% of total group profit.

We are revising our earnings forecasts downwards for FY18 and FY19 by 10% and 6% respectively after taking into account the firmer ringgit against the greenback compared with FY17, the normalisation of deferred income from Yemen LNG and the impairment risk of receivables for Seri Balhaf and Seri Balqis.

Downgrade to “neutral” with a reduced TP of RM7.36 per share (previously RM7.68 per share) pegged at 0.91 times price-to-book value representing a discount of 0.75 standard deviation below its five-year average. Our neutral stance is predicated on sluggish LNG spot rates, contract renewal risk for its FSO projects and low demolition in the LNG shipping space. These, however, could be offset by MISC’s strategic term-to-spot ratio for its petroleum vessels coupled with its chemical tankers being injected into a pool to optimise utilisation. — MIDF Research, April 23