By Khairul Khalid
The sharp drop of world crude oil price in recent months has aided MISC’s rebound, with growing demand and increasing charter rates of its shipping businesses improving earnings. How long will it last?
Update: Malaysia International Shipping Corporation (MISC) Bhd recently posted better than expected results for the third quarter of the financial year 2014 (3Q14), with core earnings of RM481 million, an increase of 56.6% quarter-on-quarter (q-o-q) and 8.7% year-on-year (y-o-y), on the back of RM2.1 billion revenue.
Although 3Q14 revenue dropped 14% q-o-q, operating margin was up 4.5 percentage points (ppts) y-o-y and 7.2% q-o-q, attributed to better earnings from all shipping operations – liquefied natural gas (LNG), petroleum and chemicals.
The main contributing factors to this positive performance were improved tanker rates from both the petroleum and chemical divisions, resulting in lower operational losses at the petroleum and chemical divisions, as well as improved earnings in the LNG (liquefied natural gas) segment.
Lower crude oil prices have also driven higher freight demand. The petroleum segment is expected to pick up in 4Q14 during the winter season, especially with growing demand in Asia.
Business model: Incorporated in 1968, MISC Berhad today is among the world’s leading international shipping and maritime conglomerates. Its fleet of more than 100 vessels is the world’s second largest LNG (liquefied natural gas) tanker fleet and, backed by a workforce of about 10,000 globally, delivers nearly 10% of the world’s LNG across the waves.
The company’s businesses encompass shipping, offshore, tank terminal, marine and heavy engineering, integrated logistics as well as maritime education and training. Of these however the LNG shipping segment makes up the bulk of its pre-tax profits in the 2013 financial year at 61% while bringing in 30% of group revenue. This is by virtue of a majority shareholding by Petronas (Petroliam Nasional Berhad), following a five-vessel injection exercise into MISC in 1998.
Also, virtually all of MISC’s LNG business comes from Petronas.
Last year the company welcomed its biggest vessel to-date, the Gumusut-Kakap Semi-Submersible Floating Production System (Semi-Sub FPS) — Asia’s first deepwater semi-submersible floating production and storage system in the region — which was constructed at its subsidiary Malaysia Marine and Heavy Engineering Holdings Berhad (MMHE)’s yard.
Shareholders and management: State-owned oil and gas company Petronas is the majority shareholder of MISC with 62.67% as of the latter’s 2013 annual report published last April. Other substantial shareholders are the Employees Provident Fund (EPF) with 8.32% and Skim Amanah Saham Bumiputera, a Bumiputera-only unit trust wholly owned by Permodalan Nasional Berhad, has 5.81%.
MISC’s management is led by president and chief executive officer Nasarudin Md Idris, who assumed the position in 2010 after a six-year non-executive directorship. Prior to MISC, his long career with Petronas began in 1978 and had held various positions within the Petronas group. Nasarudin is also a director of Bintulu Port Holdings Berhad and NCB Holdings Berhad, which operates Northport among others.
Share performance: Over twelve months, MISC’s shares have risen steadily by approximately 32%.
In December 2013, the counter traded between the RM5.20 – RM5.60 range, a relative slump compared to the heights of pre-2011 prices above the RM8.50 mark, although not as bad as RM3.87 on two occasions in June 2013 which was its lowest point since the turn of the millennium.
The main catalyst of that slump was a controversial bid by Petronas to take MISC private on Jan 30, 2013, offering RM5.30 per share compared to the previous closing price of RM4.35 per share on Jan 29.
Petronas subsequently upped the bid to RM5.50 on April 5 that year. Controversy arose when EPF accepted the revised offer one week before the deadline, raising criticism over its perceived meekness.
The RM5.50 price was far below most analysts’ market valuations and had either EPF or PNB refused the offer, the privatisation attempt would have been dead in the water.
The attempt was eventually announced as a failure on April 19, 2013 and MISC’s share price fell by nearly 14% the following trading day. However the stock’s subsequent ascent appears to have vindicated the minority shareholders’ refusal to take Petronas’ offer.
What analysts think: Some analysts, such as RHB, are optimistic about MISC going into 2015.
“We lower our estimated losses from both its tanker divisions (petroleum and chemical) in financial year 2014 (FY14) on our expectation of much-improved tanker rates in 4Q14, due to the recent strength of the winter rally in freight rates across the board.
We also lift our overall earnings estimates for FY14/FY15/FY16 by 5%, 5%, 4% to RM1.96 billion, RM2.19 billion and RM2.43 billion respectively,” said RHB who has upgraded MISC shares to a “Buy” rating with a target price of RM8.15.
Nevertheless, other analysts such as MIDF are more cautious about MISC’s prospects. MIDF has a “Neutral” rating on MISC with a revised target price (TP) of RM6.80.
“At this juncture, we maintain our earnings forecasts as the results were within expectations. Should its parent company (Petronas) transfer ownership of eight LNG vessels which were ordered in 2013 to MISC, we believe this would reduce the downside risk to earnings ahead of the looming LNG contracts’ expiration. With improved freight rate for the petroleum tanker division, we expect segmental losses to narrow,” said MIDF.
Earnings forecast:
StockStalk:
Potential investors may be encouraged by MISC’s steady rise in share price in the last twelve months, surprising 3Q14 results as well as some analysts’ general optimism about the company.
“We raise our forecast FY14 EPS (earnings per share) by 12% to account for the strong 3Q14, implying EPS growth of 11% in financial year 2014 (FY14). For FY15-FY16, we project subdued EPS growth of 4% and 1% respectively,” said Maybank.
With petroleum tanker rates on the uptrend (time-charter rates are up by about 37%-57% y-o-y in 3Q14) Maybank also feels that MISC’s offshore earnings could be boosted by MISC’s FPSO (floating production storage and offloading) Cendor.
MISC could also surprise shareholders with better dividends, according to AllianceDBS analysts.
“Management has hinted at a stronger DPS (dividend per share) for FY14, if 4Q14 earnings continue to be strong, which is a likely scenario. Our FY14 DPS forecast is 10 sen, but this could surprise on the upside, given the improving balance sheet position,” said AllianceDBS.
The other factor for potential investors to weigh is the fact that Petronas may inject eight of its LNG vessels into MISC.
“Though the timing of the decision is uncertain at this juncture and earnings contribution will only kick in from 2017 onwards (first vessel to be delivered in end-2016), we think the heightened news flow will support the near-term share price performance,” said Maybank.
On the other hand, there are other inherent risks, such as the unpredictability of the world crude oil price. At the moment, low crude oil price is driving improving freight rates and is a boon for MISC. Nevertheless, things could easily reverse if oil price shoots up again.
Other possible weak points include softer LNG rates due to the increasing supply of LNG vessels, which could be an offsetting factor. LNG charter rates remain under pressure (time charter and spot rates declined by 31% and 43% y-o-y in 3QFY14, respectively) due to the huge delivery of new vessels entering the market.
Another worry is MISC’s heavy engineering business via its subsidiary Malaysia Marine & Heavy Engineering (MMHE) that is struggling to replenish its orderbook, which currently stands at RM2.6 billion, which is insufficient considering its estimated burn rate of RM2 – RM3 billion annually.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KiniBiz makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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