MISC (FV RM7.45 - BUY) 9MFY11A Results Review: A Dreadful Year Passes

MISC  just reported  its first core quarterly net loss for 3QFY11 for some time. Although earnings continued to disappoint, let down by low profit from its heavy engineering division and continued losses from petroleum (albeit improving), we still think this is the best time to buy the counter as its valuation has sunk to the bottom. We are cutting our FY12 earnings by 22% on the risk of higher bunker fuel and  lower profitability from the engineering side given  the  low margins. We maintain our BUY call, with a higher FV, in the absence of a dividend for FY11. Our new FV is RM7.45, premised on an unchanged 1.5x FY12 P/B.

Earnings disappoint. Once again, MISC’s core earnings of RM249.3m for FY11A end Dec (9 months) fell short of our projected profit forecast of RM451m  although this well exceeded consensus projections of  a  RM466m core loss.  The weak showing was attributed to  the sharply lower than expected PBT at  its heavy engineering division (Q3FY11: USD16.6m vs Q2FY11: USD33.3m and the preceding quarter’s  USD36.7m) and continued losses at its petroleum segment although we acknowledge that this has somewhat narrowed.  The lower profit  at the  engineering division dragged MISC into  a core loss for the first time in a very long time.  As MISC has yet to fully exit its liner business, this division continues to  weigh on its  earnings  although this would be somewhat minimal by 1HFY12.

Slew of asset write-downs. A total of USD474.3m has been booked to provide for the group’s withdrawal from its container and liner business. Of this amount, USD127m was related to the writedown in vessels value to their estimated current market value, while USD193m  is allocated  for  the  termination of  its long term liner charter contract and USD111m provided for its existing containers. On the petroleum and chemical side, the group took USD93.8m on impairment of vessels.

A seasonal pick-up seen. Shipping activities, notably MISC’s petroleum and chemical segment, witnessed a mild seasonal pick-up in demand during the quarter, although this was  crimped by the higher bunker fuel prices. With tensions heating  up  between Iran and the rest of the world, bunker fuel price has since inched up to USD700 per tonne from the average USD646 last year.

Outlook. Given the higher bunker prices, we see MISC continue to face challenges on the earnings front this year as its petroleum shipping segment still runs the risk of making a loss. Hence we trim our FY12 earningsby some 22% although our revenue is maintained. Heavy engineering will get busy again since the group has secured new contracts worth RM1.8bn (total orderbook RM3.1bn) and may see more contribution from the tank terminals kick in by 2H after the completion of Tanjung Bin. As its liner losses will reduce sharply in FY12 (cash losses only at USD40m), we  think this is the best time to take a ride on MISC given that  valuationshave bottomed. Maintain BUY, at a higher FV of RM7.45, premised on 1.5x FY12 PB, in the absence of adividend this year.

Source: OSK188