This article first appeared in The Edge Financial Daily on August 9, 2018
MISC Bhd
(Aug 8, RM6.46)
Maintain hold with a higher target price of RM7.08: MISC Bhd’s second quarter of its financial year ending Dec 31, 2018 (2QFY18) core net profit was 33% lower year-on-year (y-o-y) as tanker losses widened from poor freight rates, heavy engineering losses widened from higher-than-expected project costs, and liquefied natural gas (LNG) profits narrowed upon the expiry of one lucrative legacy contract in June 2017. Offshore profits rose from the contribution of the new floating storage and offloading vessel (FSO) Benchamas contract and finance lease gain from the extension of the FSO Orkid contract.
At end-2QFY18, MISC had 29 LNG ships, with the last of the five newbuildings delivered on April 30, 2018, compared with 26 units in 2QFY17. Of these 29 vessels, two vessels were not being operated after their charters had terminated previously, while charter hire on two other vessels on charter to Yemen LNG until 2029 forecast (2029F) continue to be accrued, subject to 30% impairment, as the LNG plant continues to be mothballed due to the civil war. LNG earnings in 2QFY18 were pulled down by the expiry of the legacy Puteri Firus charter in June 2017, but earnings should be stable going forward as the next expiry is in 2023F.
Crude and clean tanker shipping rates continue to be poor despite a recovery over the past few weeks, driven by higher production from Saudi Arabia, which is designed to offset the curtailment of Iranian output when US sanctions resume in November 2018. Tanker fleet growth is expected to slow in 2019F due to record levels of tanker scrapping this year (on the back of low tanker earnings, high steel prices, and the 0.5% sulphur cap limits to be imposed from Jan 1, 2020F), and a modest order book-to-fleet ratio of 13.5% in June 2018, against 20.6% in January 2017. Hence, tanker rates should recover next year.
The FSO Benchamas 2 sailed away from the Malaysia Marine and Heavy Engineering Holdings Bhd (MHB) yard on April 9, 2018 and arrived at Chevron’s Benchamas field in the Gulf of Thailand on April 14. The FSO commenced its 10-year time charter in June. Meanwhile, on July 6, MISC announced that it had signed a contract with Hess Malaysia to buy over the completed FSO Mekar Bergading and bareboat charter the vessel back to Hess over 16 years, commencing Sept 1 at the latest. MISC is bidding for several more floating production storage and offloading contracts in Southeast Asia and beyond.
The heavy engineering arm (MHB) suffered a larger loss in 2QFY18 as costs related to the variation orders on several vessel projects were charged into the profit and loss account, but the revenues will only be recognised later if clients approve the variation orders. About 90% of MHB’s outstanding order book relates to one single project — the fabrication of the central processing platform for Petronas Carigali’s Bokor Phase 3 redevelopment — worth about RM1 billion, highlighting the difficulties in securing work. However, contract wins may pick up in 2019F on the back of higher oil majors’ capital expenditure in the light of stronger oil prices. — CGSCIMB Research, Aug 7