This article first appeared in The Edge Financial Daily on February 15, 2018

MISC Bhd 
(Feb 14, RM7.08)
Upgrade to hold from sell with a higher target price (TP) fo RM6.85: MISC Bhd’s financial year 2017 (FY17) core net profit of RM2.15 million was ahead of our forecast, but in line with street expectations. In the fourth quarter of FY17 (4QFY17), MISC made impairment charges on five liquefied natural gas (LNG) (two on spot terms; three as contracts expired) and seven chemical vessels. A nine sen dividend per share (DPS) was declared, bringing the full-year DPS to 30 sen (similar to FY16). We upgrade the stock to a “hold” from “sell” and lift our 12-month TP to RM6.85 on the back of a better-than-expected company outlook.

Stripping off the RM554 million impairment on LNG/chemical vessels, US$40 million (RM157.2 million) write-back of receivables for the mobile offshore production unit termination and US$32 million impairment made on the Yemen LNG, MISC booked a 4Q core net profit of RM587 million. All in, FY17 core net profit of RM2.15 million was 8% ahead of our expectations, but was in line with the consensus estimate. The deviation against our forecast was due to better-than-expected margins. On a cumulative basis, the LNG and heavy engineering divisions reported stronger profits on the back of maiden contributions from three newly delivered Seri C class vessels and higher variation orders (VOs).

MISC’s 4QFY17 US dollar-reported revenue increased 4.3% year-on-year on the back of the maiden contribution from the Seri C class LNG vessels — Cenderawasih and Cempaka — and lower demobilisation reimbursable revenue recognised from the Offshore division. However, this was weighed down by lower petroleum tanker freight rates and a weaker heavy engineering division owing to a lack of work executed. A firmer ringgit against the US dollar (+4%) also dampened the overall revenue. 

Overall, MISC saw a decent recovery in the LNG division as delivered new builds helped support the negative impact from the low rates. Offshore performance was relatively flat, while petroleum freight rates remained challenging, although not as bad as we had expected. Heavy engineering profit was stronger due to the higher VOs being recognised. We raise our FY18 to FY19 earnings forecasts by 12% to 13% mainly to reflect improved assumptions for the LNG and petroleum divisions. As a result, we upgrade MISC to a “hold” (from “sell”) and lift our TP to RM6.85 (from RM6.50). — Affin Hwang Capital, Feb 14