MISC's FY17 earnings prospect seen lukewarm

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KUALA LUMPUR (Aug 11): The earnings prospect for MISC Bhd, which saw its second-quarter net profit fall 59% year-on-year, is expected to remain lukewarm, said analysts.

MISC's share price has been fluctuating over the past year, retreating from a high of RM7.80 on Feb 22. It has been trading in a 52-week range of RM7.03 to RM7.90, closing at RM7.29 today, with a market capitalisation of RM32.54 billion.

In a results note on Thursday, Kenanga Research analyst Sean Lim Ooi Leong said the earnings prospect for MISC remains lukewarm as both liquefied natural gas (LNG) and petroleum charter rates are still under pressure in the near term.

"We expect the heavy engineering segment to stay in the red for this year in view of depleting orderbook and limited job prospect within the fabrication space given tight capex spending from oil majors," he said.

"With weaker petroleum charter rates and no improvement in LNG tanker rates in the near term, we believe (MISC) earnings will fall by 3% in the financial year ending Dec 31, 2017 (FY17), but subsequently improve by 7% in FY18 factoring contribution from additional two new LNG vessels to be delivered by the second quarter of 2018," Lim added.

He noted that MISC had purchased two Very Large Crude Carriers (VLCCs) from Navig8 with charterers being secured and thus MISC will recognise charter income from these vessels starting from this quarter.

"However, we reckon the recovery of charter rates is likely to prolong in view of the oversupply in the LNG shipping sector. Having said that, MISC's balance sheet remains healthy with net gearing of 0.2 times, allowing it to seek opportunistic brown field replacement projects and shallow-water assets requirement in the region," he said.

Lim is maintaining a "market perform" call on MISC, but has reduced his target price (TP) to RM7.25 from RM8.04 previously as he sees limited catalyst in sight.

For AllianceDBS Research analyst Marvin Khor, he said with no temporary or structural resurgence in charter rates expected, MISC's performance for the year is expected to be likewise tepid.

"The group is seeking inorganic growth opportunities especially in the offshore space, though a short-term re-rating catalyst remains to be seen," he added.

Khor has a "hold" recommendation on MISC, with a TP of RM7.45.

RHB Research Institute analyst Wan Mohd Zahidi continues to be positive on MISC, saying the LNG and offshore segments should continue to support the group's earnings with growth projects in the near term.

"Its petroleum and heavy engineering divisions could continue to be weak — although the latter could start returning to the black as new projects recently secured are to start in FY18," he said.

Wan Mohd is maintaining a "buy" on MISC, with a higher TP of RM8.86 from RM8.34 previously, a 21% upside.

MISC saw its net profit fall to RM556.5 million in the second quarter ended June 30, 2017 (2QFY17) from RM1.35 billion a year ago, as petroleum shipping and oil and gas (O&G) structure construction revenue dropped.

Quarterly revenue slipped 3.8% to RM2.3 billion in 2QFY17 from RM2.39 billion in 2QFY16 mainly due to lower contribution from its petroleum and heavy engineering segments.

For the cumulative six months (1HFY17), net profit fell 35.7% to RM1.23 billion from RM1.92 billion in 1HFY16, despite revenue increasing 10.5% year-on-year to RM5.29 billion from RM4.79 billion.