MISC expects tanker market recovery

TIN news:  Maintain market perform with a higher target price of RM8.04: MISC Bhd’s earnings for the first quarter of 2016 (1Q16) came within expectations with interim dividend per share (DPS) of seven sen declared. While liquefied natural gas (LNG) charter rates are expected to stay flattish due to overcapacity, the company is expecting market recovery within the petroleum shipping space, earliest by the second half of 2017 (2H17) underpinned by improving crude demand and moderation of fleet growth.

MISC’s 1Q17 core net profit improved by 22% quarter-on-quarter (q-o-q) to RM511.5 million from RM418.1 million in 4Q16 after stripping several extraordinary items including a one-off gain of RM377.4 million arising from floating production storage and offloading Cendor, construction work of Benchamas 2 and Gumusut-Kakap Semi-Floating Production System (L) Ltd’s (GKL) adjudication, RM227.9 million impairment loss on receivables and RM15.6 million unrealised foreign-exchange loss. The better performance was largely due to maiden earnings contribution from Seri Cenderawasih, additional deferred revenue recognised from Seri Balhaf and Seri Balqis. Despite lower charter rates and higher bunker costs, the petroleum segmental earnings improved by 79% q-o-q due to better lightering activities and higher term to spot ratio. Year-on-year-wise, revenue increased by 25% as a result of consolidation of GKL and several one-off gains as mentioned above. However, core earnings decreased by 21% from RM644.4 million in 1Q16, mainly bogged down by weaker petroleum tanker rates and higher bunker costs coupled with absence of compensation fees received for early termination of Aman Bintulu and Aman Hakata offsetting maiden earnings from two Seri C Class LNG fleets.

MISC is looking for market recovery within the petroleum shipping space at earliest by 2H17 backed by sustainable demand and moderation of fleet growth. Meanwhile, LNG charter rates are still under pressure due to overcapacity, which is likely to last until 2018 and charterers are seeking shorter contract term of seven to 10 years instead of 15 to 20 years. Its third Seri C Class LNG new-build will be delivered in 2H17 and fleet rejuvenation plan (for petroleum and chemical segments) remains on track with delivery of eight new tankers coupled with redelivery of more expensive in-charters and older tonnages. Lastly, its subsidiary MHB’s near-term earnings outlook remains weak despite order book doubling to RM2.1 billion post engineering, procurement, construction, installation and commissioning of Bokor’s central processing platform contract win in view of limited job prospects within the fabrication space given tight capital expenditure spending from oil majors.

We make no changes to our financial year 2017 (FY17) to FY18 earnings estimates. With weaker petroleum charter rates and no improvement in LNG tanker rates in sight for the near term, we believe earnings will fall by 3% in FY17 but subsequently improve by 7% in FY18 factoring in contribution from additional two new LNG vessels to be delivered by 2Q18.