MISC
KUALA LUMPUR: MISC’s net profit for the nine months ended Sept 30, 2018 of US$231mil underperformed at only 62% of CIMB Equities Research’s previous full-year forecast, and 65% of consensus.
It had on Wednesday cut its core EPS forecasts by lowering liquefied natural gas (LNG) profits to reflect higher dry docking days and operating costs, and increasing MMHE losses.
“Maintain Hold with lower end-CY19F sum-of-parts based target price of RM6.89; the International Maritime Organisation (IMO) 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 factors were due to: 1) weak crude and chemical tanker shipping rates due to OPEC production cuts since 1Q17, 2) higher losses at MMHE which is still struggling to replenish its order book, 3) lower LNG earnings due to a contract renewal in Oct 2017 at lower rates and the bunching-up of dry-docking days in 3Q18, and 4) weaker offshore profits as the FSO Benchamas project was completed in May 2018, leading 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, “so we do not expect immediate benefits to MISC until then”.
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 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 US to eight nations to cut Iranian oil imports ends in May 2019F.
“Moving into FY20F, we fear that the International Maritime Organisation’s (IMO) 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.
On Jan 1, 2020, the IMO will implement a 0.50% global sulphur cap for marine fuels, lowering from the present 3.5% limit.
The global fuel sulphur cap is part of the IMO’s response to heightening environmental concerns, contributed in part by harmful emissions from ships.
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