MISC Bhd
(Aug 15, RM7.18)
Maintain hold with a higher target price (TP) of RM6.82: MISC Bhd’s stronger year-on-year (y-o-y) core net profit growth (+16%) in the second quarter of 2019 (2QFY19) was mainly driven by better margins at the petroleum segment (+9 percentage points [ppts] y-o-y), while liquefied natural gas (LNG) and offshore margins also held up nicely at +4ppts y-o-y. Heavy engineering margins also showed improvement as losses narrowed on the back of lumpy variation orders recognised in 2QFY19.

The trend in LNG tanker rates in the third quarter of 2019 (3Q19) has improved following the seasonally weaker 2Q19. However, four to five of MISC’s LNG tankers (out of 29 tankers) will undergo dry docking activities in the second half of 2019. For the petroleum segment, MISC took a more defensive approach by shifting more of its tankers to term charters (2Q19: 65% versus 62% in 1Q19). With only very large crude carrier rates showing improvement in 3Q19 (while still stronger y-o-y for the rest of the vessels), the petroleum segment in 3Q19 will likely be weak, partly affected by higher bunker costs, which surged from the middle of June to July before falling sharply, following the correction in global oil prices in August. Demand and rates are expected to pick up in 4Q19 due to seasonality.

We maintain our earlier 10 times enterprise value/earnings before interest, taxes, depreciation and amortisation ascribed on the LNG segment, but raised offshore and petroleum segments to seven times (from six times), in line with its global peers, resulting in MISC’s higher TP of RM6.82. Dividend yield is relatively decent at 4.1%, on our estimates. Reiterate “hold” rating as valuation looks fair, trading at +0.5 standard deviation above its five-year mean of 17 times. — Affin Hwang Capital, Aug 15