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CIMB Research upgrades MISC target price to RM7.08

CIMB Equities Research has upgraded its sum-of-parts based target price for MISC to RM7.08 as it had been too conservative on secondhand tanker prices and as it incorporated the new FSO Bergading contract.

It said on Wednesday MISC’s 1H18 core net profit made up 46% of its previous estimate, which was in line with expectations given that the 2H is expected to perform better.

“Although petroleum tanker losses were larger than expected, this was offset by higher-than-expected offshore profits. Thus, our forecasts are largely unchanged.

“We maintain our Hold call as the crude tanker freight rates appear to have bottomed, but the cyclical upturn is probably a year away,” it said.

MISC’s 2Q18 core net profit was 33% lower on-year as tanker losses widened from poor freight rates, heavy engineering losses widened from higher-than-expected project costs, and LNG profits narrowed upon the expiry of one lucrative legacy contract in June 2017.

Offshore profits rose from the contribution of the new FSO Benchamas contract and finance lease gain from the extension of the FSO Orkid contract.

At end-2Q18, MISC had 29 LNG ships, with the last of the five new buildings delivered on April 30, 2018, compared to 26 units in 2Q17.

Of these 29 vessels, two vessels were not being operated after their charters had terminated previously, while charter hire on two other vessels on charter to Yemen LNG until 2029F continue to be accrued, subject to 30% impairment, as the LNG plant continues to be mothballed due to the civil war.

“LNG earnings in 2Q18 were pulled down by the expiry of the legacy Puteri Firus charter in June 2017, but earnings should be stable going forward as the next expiry is in 2023F.

“Crude and clean tanker shipping rates continue to be poor despite a recovery over the past few weeks, driven by higher production from Saudi Arabia, which is designed to offset the curtailment of Iranian output when US sanctions resume in November 2018,” it said.

CIMB Research said the tanker fleet growth is expected to slow in 2019F due to record levels of tanker scrapping this year (on the back of low tanker earnings, high steel prices, and the 0.5% sulphur cap limits to be imposed from January 2020F), and a modest orderbook-to-fleet ratio of 13.5% in June 2018, against 20.6% in Jan 2017. Hence, tanker rates should recover next year.

The FSO Benchamas 2 sailed away from the MMHE yard on April 9, 2018 and arrived at Chevron’s Benchamas field in the Gulf of Thailand on April 14. The FSO commenced its 10-year time charter in June.

Meanwhile, on July 6, MISC announced that it had signed a contract with Hess Malaysia to buy over the completed FSO Mekar Bergading and bareboat charter the vessel back to Hess over 16 years, commencing Sept 1 at the latest.

MISC is bidding for several more FPSO contracts in Southeast Asia and beyond.

The heavy engineering arm (MMHE) suffered a larger loss in 2Q18 as costs related to the variation orders on several vessel projects were charged into the P&L, but the revenues will only be recognised later if clients approve the variation orders.

About 90% of MMHE’s outstanding orderbook relates to one single project – the fabrication of the central processing platform for Petronas Carigali’s Bokor Phase 3 redevelopment – worth about RM1bil, highlighting the difficulties in securing work.

However, contract wins may pick up in 2019F on the back of higher oil majors’ capex in light of stronger oil prices.
Source: The Star

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