MISC Berhad - 3Q12 slightly below expectations

Period    3Q12/9M12

Actual vs. Expectations     MISC’s 3Q12 net profit for its continuing operations of RM194.4m brought the 9M12 net profit to RM693.2m, slightly below our expectations at 69.8% of our FY12 estimate (RM992.8m).

 Including the loss from the liner division and excluding the provisions for impairments, the 9M12 results of RM249.3m only made up 40% of the consensus’ CY12 net profit estimate of RM623.4m. 

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

Dividends   No dividend was declared.

Key Results Highlights      QoQ, the revenue was down 7.9% mainly due to the weaker heavy engineering and integrated logistics divisions earnings. However, the net profit narrowed significantly (54.4%) due to: 1) a lower operating income in 3Q12 (vs. 2Q12 which was bumped up by dividend income and forex gains); and 2) weaker associate earnings caused by MMHE, which made a provision on its FPSO Cendor project. 

 YoY,  despite the slight increase in revenue (+3.9%), the net profit was down by 43.1% due to a lower other income and weaker heavy engineering contribution.

 The liner division recognised a slightly higher loss as there were still residual costs to be closed out.

Outlook   Tough times remain for the Petroleum and Chemical business due to volatile charter rates, unyielding bunker costs (vs. dwindling charter rates) and the imbalance in the demand and supply of vessels.

 The 50% sale of the Gumusut-Kakap project will be tabled for shareholders' approval this coming Friday.

Change to Forecasts    We have reduced our FY12-13 heavy engineering division earnings by 31.6% and 4.8%, given the weakness in MMHE, which we believe could also spill over to FY13. Consequently, we have reduced MISC’s FY12-13 net profits by 5.2% and 2.9% respectively.  

Rating  Upgrade to OUTPERFORM

Valuation    The cut in our estimates resulted in our target price being reduced slightly to RM4.61 (from RM4.66). 

 However, we believe that the market has oversold the stock on the back of the negative news from MMHE. Given the 16% upside (13% capital upside and a dividend yield of 3.7%) we are thus upgrading our rating on the stock to an OUTPERFORM. 

 Note that we have excluded the value of the assets of Petroleum and Chemical Shipping as we expect the division to remain loss-making in the near future.

Risks   1) Lower freight rates, and

 2) Higher bunker costs.  

Source: Kenanga