MISC’s earnings estimated to be ‘flattish’ over the next few years

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(Sept 15, RM6.79)
Maintain neutral with target price of RM7.21:
The outlook for petroleum shipping is looking positive as supply remains tight, notably on Aframaxes and very large crude carriers (VLCCs), where MISC stands to benefit.

Earlier this month, China made a move to break the domestic oil market monopoly when a non-oil state company was granted a crude oil import licence for an annual quota of up to 200,000 tonnes.

India has also been refilling its oil reserves. This may pave the way for more demand for oil and we have noticed a high demand for shipments out of the Caribbean to Asia, giving a boost to freight rates.

As disclosed in MISC’s monthly industry newsletter, petroleum tanker rates achieved year-to-date, as at August, average increases in the 17% to 90% range, higher than our forecast of 20% in financial year 2014 ending Dec 31 (FY14) and 12% in FY15. A 10% increase to our assumptions will bump up our earnings by 10% and 20% in FY14 and FY15 respectively.

Recall that MISC is about to see five of its liquefied natural gas vessels nearing contract expiry from 2014 to 2017. One contract has expired, and the vessel may undergo refurbishment to prolong usage life.

With spot rates on the downtrend in the near term, the secured rates could be at US$48,000 (RM155,040) per day, which we estimate is 40% lower than the previous rates. We expect two more contracts to expire in FY15 and FY16, as guided by  management. We estimate that earnings over the next few years could be flattish at best.

Risk to further earnings downside would be the further delay in securing a charter contract renewal.

We nudge up our FY14 earnings by 7% on higher petroleum tanker earnings but lower our FY15 earnings by some 4% on lower-than-expected contributions from the Cendor floating production, storage and offloading facility and tank terminal business.  — RHB Research, Sept 15

This article first appeared in The Edge Financial Daily, on September 17, 2014.