MISC supported by asset values

by **Cals** Mon 11 Nov 2013, 14:24

Business & Markets 2013

Written by CIMB Research

Monday, 11 November 2013 10:35

MISC Bhd
(Nov 8, RM5.08)
Maintain neutral with target price of RM5.08: MISC’s nine month ended September of 2013 financial year (9MFY13) core net profit was slightly below our full year forecast at 68% due to higher-than-expected tanker shipping losses. Prospects for the petroleum and chemical divisions remain gloomy, but MISC is expected to grow group profit on its offshore activities.

Although we cut our FY13 core earnings per share forecasts by 10%, we raise our target price based on an unchanged 30% discount to sum-of-parts after rolling it forward to end-2014 and factoring in higher expected petroleum vessel prices.

While losses at its liquid bulk segments are likely to persist, asset values lend strong support to MISC’s share price. Therefore, we upgrade from “underperform” to “neutral”.

MISC posted a third quarter (3Q) FY13 core profit of US$104 million (RM330.72 million), up a staggering 196% year-on-year (y-o-y) due to a boost in LNG profit by a full quarter’s contribution from FSU Lekas (against just one month in 3QFY12).

Chemical losses narrowed on higher freight rates and lower bunker prices, while the absence of container shipping losses also helped. Associate contribution rose 237% y-o-y due to US$16.9 million earnings from its 50% stake in FPS Gumusut-Kakap in 3QFY13. Petroleum tanker losses, however, widened as rates remain persistently weak, while Malaysia Marine and Heavy Engineering Holdings Bhd continued to see declining profits due to its failure to replenish its order book.

One of MISC’s LNG vessels will finish its 20-year charter in July 2014. Discussions for a renewal with the charterer Petroliam Nasional Bhd (Petronas) have been ongoing for some time but progress has been slow, raising the risk that MISC and Petronas may not be able to agree on the terms of the renewal. Also, the Puteri Intan is old and fuel efficiency is likely poor. Petronas’ Gladstone LNG project has also been delayed, reducing its need for an immediate renewal.

MISC estimates that aframax freight rates will need to almost double from existing spot market levels for the petroleum division to get back into the black; this is not expected until 2015/16 at the earliest. Chemical tanker losses are expected to persist until 2016/17, unless bunker costs fall or spot rates rise unexpectedly. — CIMB Research, Nov 8

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This article first appeared in The Edge Financial Daily, on November 11, 2013.