MISC reported a core net profit of USD266.7m, beating our and consensus estimates. Stripping its discontinued liner business, core earnings came in at USD468m, down 1% y-o-y due to the drag in its petroleum tanker segment, although this was cushioned by higher profits from its offshore and tank terminal divisions. We see 2013 to be a better year for MISC with earnings growth, to be lifted by its LNG, offshore, tank terminal and heavy engineering divisions. We maintain our call to BUY and reject the RM5.30/share cash offer made by Petronas. Our new SOP-derived FV for MISC is RM6.03.
A respectable performance. MISC reported a core net profit of USD266.7m, beating our and consensus estimates, reversing from previous year’s core net loss of USD286m. On an apple to apple comparison, stripping its discontinued liner business, core earnings came in at USD468m, down by only 1% y-o-y, largely attributed to the continued loses from its petroleum and chemical segments, although the loses were cushioned by higher profits from its offshore and tank terminal divisions. During the course of the year, MISC recorded net exceptional items amounting to USD16.8m, largely attributed to the impairments and provisions on its tanker and liner vessels respectively, though both these costs were significantly offset by a substantial one-off gain of USD32.6m from the 50% realisation of intragroup profit from the Gemusut Kakap rig and a USD91m gain on disposal of assets through finance lease recognisation (two FSUs for the Lekas Regasification Project).
How the quarter fared. 4Q was a seasonally stronger quarter as rates for the petroleum and chemical shipping segment improved on the back of a demand pick-up from China. LNG’s profitability came in higher, noting that it was hit by plant shutdowns in 3Q. Against the backdrop of higher demand for oil coupled with the prolonged winter, the shipping segment is likely to see a better performance going into 1Q. We note that offshore were seasonally weaker but this was relatively much better at PBT level, owing to the bonus received from asset uptime performance. The tank terminal segment’s earnings improved significantly by 30% due to contribution from the Tanjung Bin tank terminal.
Petroleum still loss-making. While it appears that petroleum and chemical tanker rates have hit rock bottom, management continues to reiterate that the former will continue to see rates depressed throughout 2013 as the supply glut of vessels persists, notably of the aframaxes, which MISC is heavily exposed to. Rates are likely to be flattish and we have now factored that into our model. Chemical is expected to see an improvement in rates pushed by higher demand as the supply side is more balance. On the conservative side, we continue to project losses, though narrowing for both chemical and petroleum. Profits can only be seen in FY14 for chemical and FY15 for petroleum.
Downsizing the aframaxes. MISC’s capex plan will not be too aggressive other than taking in the delivery of four VLCCs. These four VLCCs are on a time charter basis and is expected to be profitable, at least at cash operating level. To contain losses from the petroleum division, management is currently in the midst of disposing off at least three to four of its aframax owned and terminating four of its charters once it expires this year.
LNG outlook moving forward. Management maintains a conservative stance on its LNG prospects citing cautiousness on potential LNG project delays which could put downward pressure on spot rates. Its strategy remains; buy assets only when a long term charter has been secured. According to management, charters up for renewal in the near term are only to be seen sometime in FY15 and these are mostly five to 10 year charters to third parties. We do not expect any new LNG vessels into its fleet over the near term.
2012 a balance sheet and restructuring story. 2012 was the year of strengthening its balance sheet after disposing of the cash burning liner division and a 50% stake of the Gemusut Kakap. We note that the sale of the latter asset had significantly reduced its net gearing from 45% to 24%. Moving into FY13, management will focus on improving operational efficiencies and cut costs. We won’t be seeing much improvement from as earnings for the group is driven by market forces given the sizeable impact of the overall shipping segment.
Earnings upgraded. Due to housekeeping and noting the fact that FY12 results came in better than we had expected, we upgrade our FY13 earnings forecast by 7.6%. However, as we have become more conservative on the outlook of the petroleum segment, we tone down our estimate for FY14 by some 8%. We see 2013 as be a better year for MISC as earnings growth, albeit marginal, would be lifted by its LNG, offshore, tank terminal and heavy engineering divisions.
Maintain reject offer and BUY recommendation. We maintain our call to BUY and to reject the cash offer of RM5.30/share made by Petronas. We have shifted our valuation methodology to sum of parts now as this would give more clarity on the breakdown of each division. Our sum of parts value on MISC is RM6.03 (versus RM6.58 previously based on price to book value). Investors have up to 19 March to decide whether to accept the Petronas offer.
Source: OSK
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