CIMB Research cuts MISC target price to RM6.92, more tough times ahead

2016-08-08

CIMB Research cuts MISC target price to RM6.92, more tough times ahead

CIMB Equities Research has cut MISC’s target price to RM6.92 from RM7.57 as it expects more headwinds for the LNG shipper and more impairments ahead.

It said on Friday MISC’s 1H16 core net profit of US$288mil made up 44% of its previous full-year estimate, which suggests that MISC’s FY16 EPS may undershoot by about 10%.

“The pressure points of weaker LNG and MMHE (Malaysia Marine and Heavy Engineering Bhd) earnings are familiar, but after six consecutive quarters of strengthening, petroleum tanker earnings fell on-year in 2Q16.

“Only the offshore segment did better, after MISC raised its stake in Gumusut-Kakap from 50% to 100% effective 13 May 2016, but this has been flagged since February.

“We stay Hold, but cut the sum-of-parts (SOP) and apply a larger 25% discount to SOP to derive our target price of RM6.92 (from 20% discount) on account of the rising risks,” said the research house.

MISC reported core net profit of US$117mil in 2Q16, down 44% on-year and 31% on-quarter. The main “culprit” was the 42% on-year decline in LNG earnings, as a result of Petronas’s early termination of two LNG contracts in 4Q15 (Tenaga Dua, Tenaga Tiga), and another two in 1Q16 (Aman Hakata, Aman Bintulu), and Yemen LNG’s suspension of two contracts during 1Q16 (Seri Balquis, Seri Balhaf).

CIMB Research said the full-quarter impact of the events in 1Q caused the 2Q LNG profits to fall 17% sequentially.

Meanwhile, MMHE saw its small 2Q15 profit decline to slightly below breakeven in 2Q16, due to the completion of major projects and the inability to replenish its orderbook in the current oil price environment. The major negative surprise was the 60% on-year fall in AET’s earnings, which also fell 64% on-quarter.

Petroleum tanker spot rates had declined materially during 2Q on a confluence of negatives, and continued to decline into July.

Only MISC’s offshore division did better, registering 38% on-year and 19% on-quarter profit growth, as a result of a larger contribution from Gumusut-Kakap (GKL). On May 13, 2016, MISC completed the acquisition of an additional 50% in GKL, taking its stake to 100%. But this itself is unlikely to move the share price, as it has been anticipated since February.

CIMB Research said while MISC’s original understanding with Yemen LNG is for a one-year suspension, the duration of the suspension is unpredictable and could extend to 18 months or more.

Petronas has delayed the deliveries of the last three of five LNG “newbuildings” by three to six months each, due to the former’s project delays. MMHE’s losses are unlikely to reverse anytime soon given the dearth of major contracts.

“Opportunities to grow the offshore asset base is limited in the immediate future as few oil majors are interested to spend on capex,” it said.

The research house pointed out crude and product tanker rates have collapsed in July, taking rates perilously close to their 2012-13 lows, on various demand-related factors. The supply-side will see a spike in deliveries in 4Q16 and in 2017.

“As such, we think that the oil tanker sector can only get worse.

“Furthermore, we expect MISC to make a non-cash impairment charge in 3Q16 on two LNG vessels which are about to see their long-term contracts expire (Puteri Zamrud, Puteri Firus), and an impairment on the carrying value of MMHE’s West Yard,” it said.

Source: The Star

Source from : International Shipping News

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