This article first appeared in The Edge Financial Daily on January 18, 2018

MISC Bhd
(Jan 17, RM7.44)
Maintain hold with a target price (TP) of RM6.85: MISC Bhd’s earnings will likely be unexciting for the first half of 2018 (1H18). Liquefied natural gas (LNG) earnings growth is expected to be flattish year-on-year, while offshore earnings may decline due to five contracts expiring in 2018/2019. Hence, any inflection point for earnings growth will depend on tankers; however, rates may remain low until a pickup in 2H18. We cut profit after tax forecast slightly on a lower US dollar to ringgit exchange rate. We maintain “hold” with an adjusted sum-of-parts TP of RM6.85, noting it is below the current price due to offshore risk (entry price: RM6.40). 

Global fourth quarter of 2017 (4Q17) spot tanker earnings have resumed the downtrend and were below profit break-even. This was due to an influx of tanker deliveries, despite 4Q being a high season for tanker demand. Recall that MISC’s petroleum fleet has a 47:53 term:spot ratio. The majority of the fleet are Aframaxes, working in the US Gulf for lightering services. These Aframaxes are under the Carribean-US Gulf routes, which chart high spot rates of US$15,000 (RM59,250) to US$25,000. We understand that lightering demand had been high during 4Q17 (after Hurricane Harvey/Irma), though demand had recently normalised. Overall, we believe 4Q17 petroleum earnings could likely be flattish quarter-on-quarter, as the wider losses on the spot fleet could be offset by a strong lightering performance, and new time charters from very large crude carriers and shuttle tankers. 

While new floating storage and offloading (FSO) Benchamas 2 will start up in 2Q18 (less than US$10 million earnings per annum), this merely offsets the natural decline of the finance lease income from existing contracts. 2018 will see expiries of two FSOs, namely Angsi (extension) and Puteri Dulang (firm), and floating production storage and offloading (FPSO) Ruby 2 (firm). 2019 will see the firm expiries of FSO Orkid and FPSO Bunga Kertas. Out of 14 offshore assets, MISC has two idle FSOs. Excluding Gumusut, the offshore average firm contract tenure is less than four years (lower versus Yinson Holdings Bhd and Bumi Armada Bhd).

Despite the deliveries of two new Seri class LNG vessels in 1H18, the operating fleet will increase by one vessel to 28 in 2018 (due to the disposal of Aman Bintulu). LNG Puteri Firuz is now looking for a recharter (due to a charter swap agreement with Puteri Intan 1). The 28 operating fleet includes two idle LNG vessels, two spot and two suspended contracts (Yemen LNG). The other offsetting earnings factor is that Seri Balhaf and Seri Balqis should expect to recognise accrued Yemen income of US$9 million per quarter from 2018, versus US$18 million per quarter in 2017. — UOB Kay Hian, Jan 17