Shrinking with the downturn
MISC’s 1H13 core net profit was in line as it accounted for 49.5% of ourfull-year profit estimate. MISC is planning a further reduction in its fleet of petroleum and chemical tanker ships to manage losses, while its LNG fleet will also shrink as Petronas is unlikely to renew all contracts.
We raise FY13-15 EPS by 1-9% as we increase the tank terminals profit estimates, partially offset by lower LNG profits. Our target price has been raised on the back of a stronger US$, but remains at an unchanged 30% discount to its SOP, on its poor structural outlook. We keep our Underperform call with de-rating catalysts being the still tough cyclical shipping business and expected profit declines at its LNG crown jewel.
2Q13 results highlights
MISC registered a 2Q13 core profit of US$100.9m, up 41% yoy on higher LNG profits as the two FSUs began contributing from Aug 2012, lower chemical shipping losses after a rise in freight rates and lower bunker prices, and maiden contribution from the Gumusut-Kakap FPS in the last two weeks of June. This was partially offset by higher petroleum tanker losses as rates weakened, while MMHE contributions were also weaker due to the completion of the Gumusut-Kakap FPS project in 1H13.
LNG shipping outlook poor
MISC admitted that it was taken aback by Petronas’s decision to own future LNG newbuildings. In mitigation, it will negotiate potential O&M contracts for those ships, as well as earn some income from technical consultancy services. It will also pursue third-party LNG shipping contracts, now that it no longer needs to set aside balance sheet capacity for Petronas’s new LNG vessels. But in our view, these third-party contracts may not meet MISC’s minimum IRR hurdles. Meanwhile, seven of its existing portfolio of 29 LNG ships will have their contracts expire in the next five years, and we expect only five to be renewed at half the present rates, implying long-term earnings decline.
Tanker fleet to shrink
In order to contain losses, MISC plans to dispose more petroleum and chemical tankers in the near future. As a result, we have factored in lower losses from these two divisions in future years.
Results and conference call highlights
MISC’s Mr Teoh Paul Keng (Strategic Planning and Investor Relations), Puan Rozainah Awang (Corporate Finance) and Ms Gurkiran Kaur (Investor Relations) hosted the company’s 2Q13 results conference call. There were no major surprises at the briefing, but here are the key highlights:
1. MISC had walked away from a number of third-party LNG shipping contract tenders that it was shortlisted for last year, with the intention of conserving its balance sheet capacity to accommodate Petronas's need for eight additional LNG vessels. This has now proved to be a huge lost opportunity, as Petronas recently decided to procure the LNG ships itself instead of chartering them from MISC .
2. However, Petronas’s decision now means that MISC will be free to pursue third-party LNG shipping contracts. In our opinion, however, time charter rates are likely to come under pressure due to future newbuilding vessel deliveries, of which some have been speculatively ordered. With current time charter rates just marginally above the minimum time charter rate that we believe MISC will require to secure high single-digit IRRs, the company may end up withdrawing from bidding if rates decline further.
3. MISC is not optimistic on the prospects for its core aframax tanker fleet and will continue to reduce its exposure to the segment via disposals of owned aframax ships and charter returns.
4. Chemical tanker rates have begun to taper after a good run over the past few quarters. Chinese demand for chemical imports are slowing due to moderating economic growth and increased domestic petrochemical production capacity. On the supply side, additional newbuilding capacity will be hitting the waters in 2014 following strong newbuilding orders last year, and could place new pressure on chemical rates. MISC's chemical tanker segment continues to incur losses and the company admits that mid-term prospects remain negative.
Publish date: 19/08/13