MISC focuses on core operations
Hence move to dispose of non-core assets does not surprise market observers
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.