CIMB says MISC net profit below forecast

PETALING JAYA: MISC’s net profit for the nine months ended Sept 30, of US$231mil underperformed at only 62% of CIMB Equities Research’s previous full-year forecast, and 65% of consensus.

It had cut its core earnings per share forecast by lowering liquefied natural gas (LNG) profits to reflect higher dry docking days and operating costs, and increasing MMHE losses.

“Maintain ‘hold’ with lower endCY19F sum-of-parts based target price of RM6.89; the International Maritime Organisation 2020 may raise fuel costs which the shipping industry may not fully recover,” it said.

On the financial results, CIMB Research said MISC’s 3Q18 core net profit was 45% lower on-year, while 9M18 was 40% lower, continuing the negative on-year trend seen during 1H18.

The were several factors for this including weak crude and chemical tanker shipping rates due to Opec production cuts since 1Q17 and higher losses at MMHE which is still struggling to replenish its order book.

The lower LNG earnings due to a contract renewal in October 2017 at lower rates and the bunching-up of dry-docking days in 3Q18 as well as weaker offshore profits as the floating, storage and offloading facility Benchamas project was completed in May 2018, also led to the absence of construction profits in 3Q18.

CIMB Research said LNG spot rates have spiked due to strong demand from China on the approaching winter and as China moves towards reducing reliance on highly-polluting coal.

MISC has two LNG vessels which are not locked into long-term contracts, but the Seri Anggun (145,000 cbm) is locked up in a 12-month time charter until 1Q19F and the Seri Bakti (152,000 cbm) is contracted for 18 months until 3Q19F.

MISC has one more idled vessel – the Aman Hakata – but its capacity is only 18,000 cbm and will not earn much for MISC even if it finds employment.

Two 152,000 cbm vessels, the Seri Balhaf and Seri Balquis, remain on charter to Yemen LNG, and have been laid-up since March 2016 on account of the Yemeni civil war, but the charterer has not given permission for MISC to use the vessels on the spot market.

“If the negotiations are successful, MISC will need six months to reactivate the two vessels,” it said.

Crude tanker freight rates have recovered sharply since 3Q18, as oil production by Opec and Russia have risen significantly since May 2018, ahead of the unilateral US sanctions on Iran.

The benefits should flow through to AET Tanker Holdings Sdn Bhd, from 4Q18F onwards after a typical lag period.

Given slower tanker fleet supply growth expected in 2019F, freight rates should recover next year, but the strength of the recovery may be tempered by the potential for Saudi Arabia and other Opec members to cut production in early-2019F.

Another factor is the likely accelerated drop in Iranian oil production after the six-month grace period given by the United States to eight nations to cut Iranian oil imports ends in May 2019F.

“Moving into FY20, we fear that the International Maritime Organisation’s 0.50% global sulphur cap for marine fuels rules will cause a spike in marine fuel costs from US$470 a tonne today to potentially US$800 a tonne.

“We have assumed that AET can pass on 80% of the increase, with the remaining 20% to be absorbed by AET, causing its forecast losses to widen again in FY20F.