MISC Bhd
(May 5, RM8.89)
Downgrade to “sell” from “hold” with a target price (TP) of RM7.60: MISC Bhd’s (MISC) first quarter financial year 2015 (1QFY15) core earnings came within our and street estimates. 

The higher earnings from petroleum and offshore segments were offset by lower earnings from its liquefied natural gas (LNG) and chemical divisions. 

No change in forecast and TP of RM7.60. 

However, given the recent sharp rise in share price, we downgrade to sell, as we see limited catalysts.

In 1QFY15, MISC reported a flat year-on-year (y-o-y) core earnings of RM486.3 million (a decrease of  17.6% quarter-on-quarter [q-o-q], despite an 8.7% y-o-y increase in revenue [an increase of 8.9% q-o-q]). 

This is in line with our expectations at 24% of our full-year forecast, and 22% of street estimates. 

Earnings from the petroleum segment rose 66% y-o-y on higher average charter rates. 

However, the full impact was mitigated by the 22% decline in earnings from its LNG business on lower earnings and the contract expiry of tanker Puteri Delima. 

No dividend was declared for 1QFY14.

In the near term, while MISC has secured firm contracts for its expiring LNG vessels, earnings from  the LNG segment will be affected as three vessels will be off charter for refurbishment, which will normally take between three and five months. 

We expect the petroleum segment to continue improving on higher freight rates underpinned by sustained global oil production and stocking exercises on lower prices. 

However, the positive impact may be partially offset by the offshore segment on the back of lower capital expenditure (capex) and operating expenditure (opex) by oil companies as well as the challenging outlook for its chemicals and heavy engineering segments.

We maintain our FY15 to FY17 earnings per share estimates and our sum-of-parts TP of RM7.60. 

Given the recent rally in share price, we believe the positives have already been reflected. 

With limited catalysts in the near term, coupled with muted results, the share price rally is unsustainable in our view. 

We believe the long-term contract in LNG will continue to provide stability to MISC’s earnings. 

Risk to our recommendation includes stronger-than-expected earnings from its offshore and petroleum segments. — Affin Hwang Investment Bank Bhd, May 5

This article first appeared in The Edge Financial Daily, on May 6, 2015.