MISC Bhd
(July 23, RM7.94)
Upgrade to hold with an unchanged target price of RM8.08. Liquefied natural gas (LNG) charter rates continue to be in the doldrums, given the oversupply of LNG ships. Speculators continue to build up LNG fleets ahead of the commencement of LNG projects.

Two of MISC’s 27 LNG ships, which are operating on short-term charters, are exposed to the negative trends. On the other hand, petroleum charter rates remain high in the second quarter of financial year 2015 (2QFY15) despite weak seasonality. The rate was supported by weak crude oil prices, which recently dropped to US$50 (RM190) per barrel.

Furthermore, the Middle Eastern countries have been selling their crude to Asia clients at discounts to their benchmark prices. Notably China has been the largest single buyer. 

We expect MISC, via its wholly-owned subsidiary AET Tanker Holdings Sdn Bhd’s petroleum tankers, to leverage on the strong momentum and report profits for the upcoming 2QFY15 results, offsetting weaker earnings from LNG tankers.

Contract replenishment by Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE), which is 66.5%-owned by MISC, remained slow with only RM500 million won year to date. 

The fabrication industry remained lacklustre, given the plunge in the oil price has delayed capital expenditure by major oil companies.

Risks to our call include continued oversupply of LNG and chemical ships, lack of new contracts for MMHE and offshores, and slow recovery of global economy.

At this juncture, we are maintaining our forecasts pending further information from the management. — Hong Leong Investment Research, July 23

This article first appeared in The Edge Financial Daily, on July 24, 2015.