MISC Berhad -4Q12 above expectations

Period  4Q12/FY12

Actual vs. Expectations   MISC’s estimated 4Q12 core net profit of RM321.9m brought its full year core net profit to RM1.0b, above our estimate of RM941.4m and way ahead of the consensus net profit of RM608.6m.

 Our core earnings excludes the RM384m in gain on the disposal of its assets due to finance lease treatment (USD91.7m) and the realisation of intragroup profit (USD32.6m), which we deem as non-core earnings.

 The company has reclassified its liner division as a discontinued division in 1Q12. Our net profit forecasts exclude the losses from the liner division given MISC’s impending exit from this business by late FY12.

Dividends  No dividend was declared, this was below our expected NDPS of 15sen.

Key Results Highlights  QoQ, the net profit was up by 49% due largely to a tax credit in 4QFY12 and the margin expansion at its heavy engineering division. Recall that in 3QFY12, the heavy engineering division took a massive hit due to provisions for the FPSO Cendor project. There were no such provisions in this quarter.

 YoY, despite the slight decrease in revenue (-2.6%), the 4QFY12 net profit was still higher as there were lower losses from the Petroleum and Chemical divisions. This came as rates are slowly bottoming in the industry.

Outlook  Overall, management highlighted that the LNG business prospect should stay intact in 2013. However, the Petroleum and Chemical divisions would still be sluggish and as such, MISC is looking to restructure its Petroleum division.

 We believe that the privatisation bid on MISC by its major shareholder, Petronas in Jan-2012 should be the main focal point for investors in the short term. The offer note was announced on 21-Feb, and shareholders have until 19-Mar to decide on the proposal.

Change to Forecasts   We are maintaining our FY13-14 net profit estimates pending the outcome of the takeover proposal by Petronas.

Rating    Maintain ACCEPT OFFER

Valuation  The take-over price of RM5.30/share works out to be 1.16x P/BV (BV/share as at 3QFY12 was RM4.54/share), which we consider as a fair deal given that the P/BV of MISC has been steadily de-rating in the past 5 years (latest 5-yr average Fwd P/BV of 1.5x versus latest 2-yr average of 1.2x). Assuming a similar de-rating going forward, we believe that Fwd P/BV averages could trend towards 0.8x P/BV, below that being offered by Petronas. So we continue to advise investors to accept the offer.

Risks  1) Lower freight rates, and 2) higher bunker costs.

Source: Kenanga