Seasonal winter demand expected to support MISC 4Q earnings

This article first appeared in The Edge Financial Daily, on November 22, 2018.
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(Nov 21, RM6.53)
Maintain hold with a lower target price (TP) of RM6:
MISC Bhd’s nine months of financial year 2018 (9MFY18) core profit after tax and minority interests (Patmi) of RM1 billion fell below expectations, achieving 68% and 67% of our and consensus full-year estimates.

MISC recorded overall weaker third quarter ended Sept 30, 2018 (3QFY18) results as core Patmi fell 40% year-on-year (y-o-y).

This is due to two factors: i) liquefied natural gas (LNG) earnings decline following Puteri Firus’ renewal in October 2017 resulting in lower earnings days and charter rates as well as higher dry docking costs incurred; and ii) wider losses in heavy engineering as a result of higher costs from conversion works. FSO Mekar Bergading from offshore commenced operation in 3QFY18, which partially helped to offset the weaker results.

We lower our FY18 estimate forecasts by 6% factoring in longer docking for its LNG vessels in 3Q.

Nevertheless, we can expect a 4Q sequential improvement supported by better shipping rates on the back of seasonal winter demand, narrowing in heavy engineering losses and stronger US dollar impact.

While 4Q earnings may improve due to seasonality, we remain wary on its cash flow position, which may potentially disappoint on the downside versus an earlier guided 10% decline.

We maintain our “hold” call but trim our sum-of-parts-derived 12-month TP to RM6 (from RM6.05).

Dividend yields are fairly attractive at 4.5%.

Upside risks to our call include rebound in shipping charter rates, more contracts win across the segments, or further strengthening of the US dollar. Downside risks would arise from continued decline in charter rates, unforeseen contract termination, or further ringgit appreciation. — Affin Hwang Capital Research, Nov 21