This article first appeared in The Edge Financial Daily, on May 10, 2016.

MISC Bhd
(May 9, RM7.25)
Maintain buy with a target price (TP) of RM10: MISC Bhd’s first quarter of financial year 2016 (1QFY16) core net profit of RM571 million came in within our expectations. Its core net profit margin was higher at 23.8% due to a low effective tax rate of 1.9%, a higher profit before tax (PBT) margin of 32.6%, and an increase in operating profit of petroleum operations by 500% year-on-year (y-o-y). 

We expect better profit in the second half of financial year 2016 (2HFY16) riding on the growing business and attractive charter rates in the petroleum segment. 

We maintain our net earnings forecasts for FY16, FY17 and FY18 with a TP of RM10 via our sum-of-parts valuation. We maintain a “buy”.

MISC’s higher PBT margin of 32.6% was due to an early termination compensation for two vessels of time charter contracts worth US$100 million (RM402 million). This subsequently boosted the operating profit for the liquefied natural gas (LNG) division by 107.6% y-o-y, despite LNG revenue increasing by only 2% due to weak LNG rates, which came under pressure from new vessel deliveries.

The spot rate decreased to US$40,000/day compared with US$60,000/day in last year’s corresponding quarter. 

MISC’s petroleum operating profit increased by 500% y-o-y due to port congestion in the Middle East and Far East, which lifted rates for larger vessels, low oil prices lending support to rising Chinese and Indian crude imports that benefited longer-haul voyages, and attractive charter rates for very large crude carriers at US$63,734/day, Suezmax at US$40,596/day and Aframax at US$31,606/day.

The first Petroliam Nasional Bhd’s LNG newbuild is on track to be delivered in the third quarter (3Q), followed by the second LNG newbuild in 4Q. — BIMB Securities Research, May 9