Wednesday, June 29th, 2022

MISC (MISC MK): Sequential strength from petroleum division

MISC‘s core profit in 1Q21 fell short of forecasts, accounting for only 20% of our previous full-year earnings prediction.

  • Despite a sequential earnings turnaround in the petroleum segment, profit margins fell short of our expectations.

– Reducing our earnings per share expectations by 3-5 percent. Hold is maintained, with an RM6.40 target price.

In comparison to 1Q20, tanker rates have stabilized…

The headline profit in 1Q21 was RM430 million, compared to a loss of RM1.2 billion in 1Q20. After one-offs such as an RM25 million LNG vessel impairment for disposal, an RM0.4 million disposal gain, a c.RM50 million provision for the delayed Bokor completion at MMHE level, and a RM102 million Mero-3 construction gain, core profit was slightly lower at RM402 million, down 48 percent year on year. After a big increase in freight prices in 1Q20 following the fallout between Saudi Arabia and Russia, the worse 1Q21 results reflect the normalization of its petroleum segment profit. As a result, the EBITDA margin shrank by 16.7% year over year. Overall, the results fell short of our expectations, owing to lower-than-expected petroleum segment margins.

However, this aided in the progression of improvement.
1Q21 core profit increased by 146 percent year on year, thanks to a stronger petroleum segment that reversed an RM78 million operating deficit into an RM34 million profit. This was mainly due to increased refining activities, which resulted in higher lightering demand. The term-to-spot mix in MISC’s petroleum portfolio was 67:33 (almost constant from 65:35 in 4Q20), with VLCC, Suezmax, and Aframax mixes of 11:89, 26:74, and 46:54, respectively. Tanker rates remained low in 2Q21, with a modest increase in Aframax and Suezmax due to the Suez Canal disaster. This, on the other hand, has slowed. Nonetheless, with OPEC+ gradually winding down output, we expect rates will likely recover in 2H21.

We cut our EPS predictions by 3-5 percent to reflect weaker petroleum margins, and we revise our earnings estimates for MMHE, which we now expect to lose money over the next three years. We maintain our Hold rating and decrease our SOTP-based TP to RM6.40 (from RM6.45) because the stock is trading at its 5-year historical mean PER.

Overall, near-term positives appear to have been priced in, with no new significant contracts on the horizon as MISC concentrates on delivery execution, particularly the Mero contract.

-MISC can still bid for Petronas’ FPSO Limbayong, although we expect it to have a limited impact on valuations if it is awarded due to the project’s low scale.

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