KUALA LUMPUR: UOB Kay Hian Malaysia Research has downgraded liquefied natural gas shipper MISC to Sell and also lowered its sum-of-parts based target price to RM6.25.
The previous TP was RM6.85 and the closing price on Wednesday was RM7.08.
The research house said MISC is expected to announce its 1Q18 results on May 11.
“We downgrade to a tactical Sell given there is a potential for earnings disappointment/ downgrades, although management is guiding for a flattish US$ earnings growth.
“In 1Q18, we observed: a) weaker US$/RM rate (-12%, 1Q18: 3.93 vs 1Q17: 4.45), b) higher oil prices (+23%, 1Q18: US$67/bbl vs 1Q17: US$55/bbl), c) global spot tanker rates significantly below 1Q17 levels and profit breakevens (1Q17 petroleum EBIT: US$13m), d) flattish LNG US$ earnings (normalisation of Yemen LNG’s deferred income), and e) declining earnings base and renewal risk in offshore division. • Broad-based factors are reasons to take profit,” it said.
UOB Kay Hian Research said quarterly earnings historically contain many noises (non-recurring items) due to the finance lease method.
Hence, the share price may not react to operational setbacks if the impact is minor. However, share price may react to broad-based factors which are stronger reasons to impact earnings expectations.
“Firstly, US$ is its functional currency and covers up to more than 96% of revenue. Hence, every 1% change in US$ impacts earnings by 0.9%.
“Secondly, MISC has an inverse correlation to oil prices, as it is a main component of its tanker operating costs. Assuming MISC retains its 30 sen dividend per share payout akin to 2016/17, a higher dividend yield at close to 5% may be required (vs 4.2% currently) given the said earnings risks,” it said.
The research house said a key event is the 2Q18 delivery of floating, storage and offloading (FSO) Benchamas 2, though earnings is small at less US$10mil per annum.
Without new floating production storage and offloading (FPSO) or FSO contracts, offshore earnings base will decline due to the progress of finance lease recognition and contract expiry risks.
UOB Kay Hian Research said based on its annual report, Petronas has extended the FSO Puteri Dulang by another three years until 2021.
Petrofac had renegotiated the FPSO Cendor contract from 10 firm years with four one-year extension options, to 12 firm years with two one-year extension options.
“However, MISC is still addressing the 2018 expiries of FPSO Ruby 2 and FSO Angsi, and the 2019 expiries of FSO Orkid and FPSO Bunga Kertas. Even if they are extended, the earnings would be realistically lower versus the firm contract,” it said.
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