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MISC earnings to be dragged by petroleum, heavy engineering divisions

MISC Bhd’s net profit for its financial year 2021 forecast (FY21F) is expected to decline by 14% to RM1.86 billion, due to projected losses from the petroleum and heavy engineering divisions, according to AmInvestment Bank Bhd (AmInvest).

AmInvest, however, noted that the losses could be partly offset by the absence of RM50 million to RM60 million one-off cost provision for a heavy engineering project in its first quarter ended March 31, 2021 (1Q21), and the continued construction profit from the US$2 billion (RM8.43 billion) Mero 3 (to be renamed Marechal Duque de Caxias) floating production, storage and offloading vessel, which is scheduled for delivery in the second half of 2024 (2H24).

“Going forward, we expect gradual improvement to the petroleum tanker rates as OPEC+ has decided to raise production levels by two million barrels from August to December 2021.

“Together with the upcoming delivery of two liquefied natural gas carriers, five very large ethane carriers and two dynamic positioning shuttle tankers this year, these underpin our FY22F earnings growth expectations,” AmInvest analyst Alex Goh wrote in a report yesterday.

AmInvest reiterated its ‘Buy’ call on MISC with an unchanged sum-of-parts-based fair value of RM7.75 per share, reflecting a premium of 3% from its four-star environmental, social and governance rating.

This also implies an FY22F enterprise value to Ebitda (EV/Ebitda) of 7.5 times, at one standard deviation (sd) below its two-year average of 8.5 times.

MISC currently trades at an FY22F EV/ Ebitda of six times to two sd below its three-year average of 8.5 times and supported by dividend yields of 5%.

MISC shares rose 0.91% or six sen to RM6.68 yesterday, valuing the company RM29.82 billion.

Goh expects MISC’s petroleum segment to reverse into a loss in 2Q21 compared to an operating profit of RM34 million in 1Q21.

He said the likely losses for the petroleum segment in the upcoming results are highlighted by the very large crude carriers (VLCCs) segment, which fell into negative spot charter rates for the first time in June this year to -US$122 due to overcapacity as world oil exports remained flat and below pre-Covid 19 levels despite the OPEC+ alliance agreeing to raise production from May 2021 to July 2021.

He noted that June spot charter rates for Suezmax fell 79% quarter-on-quarter (QoQ) to US$2,505 and Aframax dropped 68% QoQ to US$6,222.

“On average, 2Q21 spot rates declined by 23% for VLCCs, 47% for Suezmax and 32% for Aframax,” Goh added.

The analyst said the negative impact to the group’s 2Q21 earnings could be partly mitigated by the proportion of spot-to-term (STT) charter rates for the petroleum and chemical division at 33:67 as at March 31, 2021.

The STT for Aframax, Suezmax and VLCC was 46%, 26% and 11%, respectively.

Besides that, Goh noted that MISC’s 66.5%-owned Malaysia Marine and Heavy Engineering Holdings Bhd (MHB) posted a net loss of RM139 million in 1H21.

“The loss is due to higher cost provisions in the heavy engineering division from Covid-19 movement restrictions together with a low volume of marine repair business as clients prefer Singapore yards which offer less border restrictions given a higher vaccination regime,” Goh said.

MHB’s heavy engineering division is expected to continue posting losses in FY21F-FY23F despite securing the RM1 billion Jerun central processing platform project for the SK408W block located off Sarawak from SapuraOMV Upstream (Sarawak) Inc in April this year.

The division has been loss-making over the past three years, including during pre-pandemic FY18–FY19 periods.
Source: Malaysia Reserve

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