MISC Bhd Time to be conservative again

Despite the recent run-up in MISC’s share price, we remain cautious on the company’s prospect as we believe it will continue to be plagued by several factors that are now affecting the shipping industry namely: 1) sluggish charter rates; 2) unyielding bunker costs; and 3) a continuous overcapacity. That said, we have increased our FY12-14E forecasts by 8.4%, 10.5% and 4.5% respectively as we have fine-tuned our USD/RM exchange rates and MMHE’s FY12-14 earnings forecasts. This led to a higher target price of RM4.76/share (from RM4.44/share). However, given the limited upside (total return of around 4.6%) from the current share price, we are downgrading the stock to a MARKET PERFORM call (from an OUTPERFORM) at this juncture.

A recent run-up in the share price. MISC’s share price has risen steadily (+19.8%) recently after plunging to RM3.88/share in end-June amidst concerns over a weaker outlook for both the stock and the shipping industry market. We believe the run-up is largely due to: 1) news flows reporting that downside risks for the stock could be minima;l and 2) a retracement in bunker costs leading to potential improvement in margins. While the downside risks to the earnings seem fairly limited going forward, we still believe that the overall bearish shipping sentiment will continue to weigh on MISC’s near term prospects.

Various key factors could limit further upside. Factors that still concern us are: 1) unyielding bunker costs; 2) existing weak tanker charter rates; and 3) surplus supply, which are likely to cap forward rates.

Marginal recovery in crude oil price. The downtrend in bunker costs started from May 2012 onwards. However, there has been a marginal recovery in such costs as crude oil prices gain on the back of fears that a labor dispute in Norway could result in a complete shutdown of the nation’s production. In any case, we note that bunker costs are still generally trending upward versus tanker charter rates, which seem to just move sideways.

Tanker rates continue plodding on. Despite some upward blips in the year, we note that the Baltic Dirty and Clean Tanker Indices remain uninspiring at649 and 557 respectively. They are still very much lower from their heydays back in 2007-2008 when they averaged at 1124-1510 (Dirty Index) and 973.6- 1155 (Clean Index) respectively. We also understand that forward charter rates will very likely be capped by the newbuilding surplus that will stretch till 2014.

Forecasts. In-line with our new 3QFY12 in-house exchange rate assumptions, we have upgraded our FY12-14 USD/RM exchange rates assumptions to RM3.12, RM3.06 and RM2.91 respectively (from RM2.95, RM2.85 and RM2.85). We have also increased our MMHE estimates to reflect the addition of the Kebabangan project (of around RM1.0b) novated from Sime Darby. Overall, our FY12-14E forecasts have increased by 8.4%, 10.5% and 4.5% respectively to RM1.0b, RM1.2bn and RM1.4bn.

Revised target price upwards…. Our target price for the stock has thus been revised upwards to RM4.76 (from RM4.44/share). We are still assuming that there are no values from the assets of Petroleum and Chemical Shipping as we expect it to remain loss making.

…but downgrading our call to MARKET PERFORM. Given the limited 4.6% total return upside (upside to share price of 1.4% inclusive of dividend yield of 3.2%) from the current share price, we are downgrading our call on the stock to a MARKET PERFORM (from an OUTPERFORM) at this juncture.

Source: Kenanga