This article first appeared in The Edge Financial Daily on May 28, 2019

MISC Bhd
(May 27, RM6.61)
Maintain hold with a higher target price (TP) of RM6.70: At 29%/28% of our/consensus full-year estimates, MISC Bhd’s first quarter of financial year 2019 (1QFY19) core net profit (CNP) of RM469.3 million surpassed expectations helped by higher-than-expected contribution from the petroleum segment. First interim dividend of seven sen per share (ex-date: June 10, payment date: June 25), as expected, was declared (versus seven sen in 1Q of 2018 [1Q18]).

Quarter-on-quarter (q-o-q), MISC booked in CNP of RM469.3 million after stripping off: RM23.7 million gain on business acquisition and RM17.5 million vessel disposal gain. This marked a 12% q-o-q improvement due to better contribution from: i) petroleum segment with lower vessel operating costs; and ii) stronger liquefied natural gas (LNG) (+1.8 times; higher number of operating vessels).

Year-on-year (y-o-y) core earnings improved by 51% from RM311.7 million in 1Q18, thanks to a turnaround of the petroleum segment underpinned by higher freight rates and improved LNG segment (+22%; additional vessel chartering). This has cushioned the impact from higher finance cost (+77%).

LNG spot rates have moderated after the strong surge during the winter season in 1Q19 but are still likely to register y-o-y growth. For the petroleum segment, similar trend of stronger y-o-y but weaker q-o-q on average spot rates for very large crude carriers, Suezmax and Aframax were observed. That said, upside could be capped by higher new builds and deliveries as well as moderating scrapping activities amid lingering uncertainties from trade war tension between US and China.

Current portfolio mix remains at 62:38 term to spot, allowing MISC to benefit the recovery of tanker rates.

On the other hand, order book for the heavy engineering unit increased by 5% q-o-q to RM864 million while tender book also improved by 15% to RM6.3 billion on higher local offshore structure bids. The marine repair segment will not see further deferment by shipowners for dry docking in 2019 in view of the forthcoming implementation of International Maritime Organisation in 2020. Although greenfield floating production storage and offloading projects remain the growth focus for offshore segment, we do not factor any project win in the near term given the competitive landscape.

We increased our FY19 earnings by 6% after imputing lower vessel operating costs. Meanwhile, FY21 earnings of RM1.93 billion (+2% y-o-y) are introduced.

Our sum of parts-driven TP has increased to RM6.70 after adjusting higher price-book value multiple of 0.9 times for the petroleum segment in view of better operating environment and Malaysia Marine and Heavy Engineering Holdings Bhd’s TP of 75 sen/share from 61 sen/share previously. Note that MISC’s operating cash flow has improved 51% y-o-y in 1Q19 on the back of stronger earnings. That said, we believe MISC may want to maintain its dividend per share (DPS) at 30 sen this year (flat y-o-y) for further capital expenditure expansion, implying a dividend payout of 78% and offering dividend yield of 4.6%. — Hong Leong Investment Bank Research, May 27