MISC fo­cuses on core op­er­a­tions

Hence move to dis­pose of non-core as­sets does not sur­prise mar­ket ob­servers

The Star Malaysia - StarBiz - - Companies & Strategies - By GANESHWARAN KANA ganeshwaran@thes­tar.com.my

Salient points MISC Bhd’s lat­est move to exit its prof­itable tank ter­mi­nal busi­ness comes about as rather un­sur­pris­ing to mar­ket ob­servers, largely be­cause of the com­pany’s strat­egy to fo­cus on its four core busi­nesses.

The en­ergy ship­ping and mar­itime so­lu­tions provider’s em­pha­sis on its core busi­ness seg­ments - petroleum and prod­ucts ship­ping, liqui­fied nat­u­ral gas (LNG) ship­ping, off­shore op­er­a­tions as well as the heavy engi­neer­ing busi­ness - is un­der­stand­able, mainly be­cause MISC is try­ing to con­sol­i­date its core op­er­a­tions which have been af­fected by the chal­leng­ing oil and gas mar­ket.

Dis­posal of non-core busi­nesses is im­per­a­tive for MISC at this mo­ment, as it al­lows the com­pany to free its bal­ance sheet up and to re-in­vest the pro­ceeds back into its core busi­nesses.

Two weeks ago, MISC dis­posed its 45% stake in Cen­tralised Ter­mi­nals Sdn Bhd (CTSB) to Di­a­log Group Bhd for a to­tal sum of RM193mil.

CTSB is MISC’s last non-core tank farm and ter­mi­nal fa­cil­i­ties busi­ness, which is sit­u­ated in Tan­jung Langsat, Jo­hor.

Un­der the deal, Di­a­log will pay RM137mil in cash for the 45% eq­uity stake. It will also re­pay MISC and take over its por­tion of share­hold­ers’ loan to CTSB, in­clud­ing the prin­ci­pal and ac­crued in­ter­est, amount­ing to RM56mil.

Pro­ceeds from CTSB’s dis­posal can be a shot in the arm for MISC, as the com­pany is be­lieved to be fur­ther grow­ing its port­fo­lio of ship­ping and off­shore as­sets with longterm char­ters.

Re­call, in Au­gust 2016, MISC won a US$230mil con­tract to sup­ply Chevron with the FSO Ben­chamas 2 Project in the Gulf of Thai­land. Apart from that, in June this year, Sta­toil awarded MISC long-term char­ter con­tracts for two spe­cial­ist DP2 shut­tle tankers, in ad­di­tion to the two al­ready on char­ter to Sta­toil.

Over the years, MISC which is 63% owned by Petro­liam Na­sional Bhd (Petronas), has been grad­u­ally dis­pos­ing its non-core busi­nesses. In 2015, MISC ex­ited its 50% stake in VTTI, an in­ter­na­tional tank ter­mi­nal op­er­a­tor, for US$830mil.

Last year, the com­pany sold its lo­gis­tics arm to Swift Lo­gis­tics Sdn Bhd at a price tag of RM358mil.

In a re­ply to StarBizWeek, MISC pres­i­dent cum group chief ex­ec­u­tive of­fi­cer Yee Yang Chien says that the CTSB dis­posal is part of the com­pany’s MISC2020 plan, which aims to se­cure sus­tain­able in­come go­ing for­ward.

“As part of the stream­lin­ing of our busi­ness, we have been grad­u­ally ex­it­ing the non-core busi­nesses in­clud­ing the tank ter­mi­nal busi­ness.

“With­out the scale in the tank ter­mi­nal busi­ness, our exit from CTSB is a nat­u­ral next step although our in­vest­ment in CTSB has been prof­itable all this while.

“The pro­ceeds from the di­vest­ment will be rein­vested in the core busi­nesses in line with our MISC2020 plan,” he says.

In an ear­lier note, while point­ing out that Di­a­log is the big­ger win­ner from the deal, CIMB Re­search has in­di­cated that MISC is ex­pected to make a hand­some one-off book gain from the dis­posal of CTSB stake.

“In our es­ti­mate, CTSB’s book value was likely RM172mil as at end-June 2017, of which MISC’s 45% stake would amount to RM77mil. With its eq­uity stake val­ued at RM137mil, MISC may pocket an ex­cep­tional dis­posal gain of RM60mil in FY17,” says the re­search house.

How­ever, MIDF Re­search does not see the di­vest­ment im­pact­ing MISC’s earn­ings sig­nif­i­cantly, as the dis­posal value of RM193mil rep­re­sents less than 0.4% of MISC’s to­tal as­sets.

This is rea­son­able as earn­ings con­tri­bu­tion from the tank ter­mi­nal busi­ness had not been mean­ing­ful to MISC, which de­rives the bulk of its earn­ings from its core busi­nesses.

With the sale of eq­uity stake in CTSB, MISC is ef­fec­tively left with its last non-core as­set, namely the Bin­tulu Port.

While the com­pany is not ac­tively pur­su­ing di­vest­ment of the Bin­tulu port, Yee in­di­cates that MISC re­mains open to any po­ten­tial pro­pos­als.

As part of its move to con­sol­i­date its busi­ness op­er­a­tions, the Main Mar­ket-listed MISC is now on the look-out to ac­quire as­sets within the four core busi­ness ar­eas.

“We are not pur­su­ing any new busi­ness seg­ments but we are fo­cused on de­vel­op­ing our four core busi­nesses.

“Any ac­qui­si­tion can be eas­ily fi­nanced through bor­row­ings as the gear­ing level of the group re­mains low,” says Yee.

With a min­i­mal gear­ing ra­tio of 0.3 times and a cash pile of RM5.4bil as at June 30, MISC has a sub­stan­tial legroom to fa­cil­i­tate new as­set pur­chases. No­tably, the com­pany’s gear­ing level is among the low­est of its peers in the in­dus­try.

Mov­ing for­ward, it re­mains to be seen how MISC plans to keep its head up, in the midst of a chal­leng­ing oil and gas mar­ket where char­ter rates in the LNG seg­ment and freight rates in the petroleum seg­ment re­main sup­pressed.

In the first half of FY17 ended June 30, MISC’s net profit fell by nearly 36% year-onyear (y-o-y) to RM1.23bil.

This was on the back of lower bot­tom line con­tri­bu­tions from the LNG and petroleum seg­ments.

How­ever, the com­pany’s rev­enue rose to RM5.29bil from RM4.79bil, in the six-month pe­riod.

“The LNG ship­ping mar­ket con­tin­ues to be af­fected by new­builds de­liv­ery and ex­piry of older ves­sel char­ters, which has de­pressed spot rates. How­ever, this will have lim­ited im­pact on the group’s LNG busi­ness seg­ment due to its present port­fo­lio of long term char­ters in place.

“As for the petroleum ship­ping seg­ment, ves­sel de­mand gen­er­ally im­proves with the year-end sea­sonal de­mand.

“The petroleum seg­ment will look to at­tain a good mix of time and spot char­ters as well as ex­plore ex­pan­sion op­por­tu­ni­ties within the niche shut­tle tanker seg­ment that will pro­vide long-term se­cured in­come to help mit­i­gate down­turn in the cycli­cal mar­ket,” says Yee.

MISC’s heavy engi­neer­ing busi­ness was also sig­nif­i­cantly af­fected, as its op­er­at­ing loss in­creased by nearly seven-folds y-o-y in the pe­riod.As of end-June 2017, MISC’s heavy engi­neer­ing arm, Malaysia Ma­rine & Heavy Engi­neer­ing Holdings Bhd’s (MHB) or­der book stood at RM2.16bil.

Yee adds that while MHB has suc­cess­fully se­cured sev­eral con­tracts dur­ing the pe­riod, the ma­jor­ity of the con­tri­bu­tion will only be re­alised in 2018 and be­yond.

Yee: As part of the stream­lin­ing of our busi­ness, we have been grad­u­ally ex­it­ing the non­core busi­nesses, in­clud­ing the tank ter­mi­nal busi­ness.

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