MISC - A Fruitful Parting With Liner Business

As expected, MISC reported a stark improvement in earnings after discontinuing its liner business, with 1H core earnings coming in line, accounting 55-58% of our and street estimates. While Petroleum and Chemical continues to be in the doldrums, earnings outlook for the shipping conglomerate is staged to improve further. We maintain our BUY call with our FV unchanged at RM6.45. 

Liner makes its exit; earnings finally in line. As expected, MISC reported a stark improvement in earnings after discontinuing its liner business. 2QFY12 core net profit came in at USD117.7m, up substantially from USD4m in the previous quarter and USD36.9m in corresponding quarter last year. MISC’s 1H core earnings accounts 55%-58% of our and consensus forecasts, which we deem to be inline. Revenue fell as the liner makes its exit, dropping by 18% y-o-y to an all time low.  For the quarter, aside from the loss of USD13.9m from its liner segment, the petroleum and chemical tanker division saw PBT loss of USD42.9m and USD24.7m respectively. The only surprise was the lower LNG profit contribution, down by 13% as a result higher dry docking in the 2Q.

The macro picture currently. 2Q was challenging for MISC’s petroleum and chemical shipping business which reported larger losses. Vessel oversupply continues to weigh on tanker rates, notably on the chemical tankers caused by China’s slowdown and refining plant shutdowns. Petroleum tankers saw a mix picture as VLCC rates somewhat got a boost from high stockpiling activities ahead of the Iran sanction, but this failed to lift the tonnage oversupply seen in the Suezmax and Aftramax segment. Offshore segment reported exceptionally higher earnings due to one off bonus received on asset uptime performance. The exceptional items for the quarter were mostly relating to unrealizeD forex gains, asset impairments on its aframax tankers and some write-backs on the earlier provisions booked last year. Looking at current market prices, it is likely prices of vessels could hit its bottom soon.

Re-jigging vessel portfolio. The absence of MISC’s liner business is a positive boost to earnings for the Group. But MISC is managing its overall bottomline as the petroleum segment continues to put a drag on its earnings, notably from the Aframax business. Plans to dispose of up to 6 Aframaxes, should contain some of the losses and moving forward, management will emphasize on focusing on VLCCs and shuttle tankers. MISC is expected to report full year earnings in line with our expectations, boosted by its LNG (from its 2 FSUs) and narrowing losses from the petroleum division (due to new vessel deliveries and new revenue contribution come 4Q).

BUY. MISC’s improved earnings outlook warrants optimism in its outlook. We maintain our BUY call with our FV unchanged at RM6.45 premised at 1.3x FY13 P/B. 

Source: OSK