MISC - POOR EARNINGS

Monday February 27, 2012

Analysts cautious on MISC

By SHARIDAN M.ALI
sharidan@thestar.com.my

Company’s prospects uncertain on poor earnings visibility

PETALING JAYA: Analysts remain cautious on MISC Bhd’s prospects going forward due to poor earnings visibility of its petroleum tankers, chemical tankers and liner divisions.

This was after the world’s single largest owner-operator of liquefied natural gas (LNG) tankers was dragged into the red for the first time in its history in its financial year ended Dec 31, 2011 with a net loss of RM1.48bil on revenue of RM8.5bil.

The loss was mainly due to recognition of one-off provisions totalling RM1.4bil following its recent decision to exit from the liner business. Excluding liner provisions, the group also recognised RM287.2mil impairment losses on its vessels on the back of the poor shipping market.

MISC had on March 2, 2011 announced the change of its financial year-end from March 31 to Dec 31. The first new financial year ended on Dec 31, 2011 with a shorter nine-month period.

Kenanga Research said the MISC management anticipated a gloomy outlook for charter rates, which had yet to bottom out partly due to the oversupply of vessels.

“The continuous rising bunker price definitely does not augur well for its shipping business and this will likely persist for another two to three quarters before it gets better.

“Although we are positive on its exit from the liner business, we remain cautious on the company due to its poor earnings visibility,” said Kenanga in recent report.

It added that the overall shipping businesses performed poorly as even its usual star performer, the LNG shipping division, registered a 1.1% contraction in its earnings before interest and taxation (Ebit) in the quarter ended Dec 31.

“This was mainly due to escalated bunker price where, currently, the bunker price remains high at US$728 to US$730 per tonne.

“In addition, higher drydocking days and lower off hire days had squeezed LNG’s margins while soft charter rates continued to compressed petroleum and chemical shipping’s profitability,” said Kenanga.

Hong Leong Investment Bank Research (HLIB) expected further impairment on petroleum tankers at US$22.1mil (RM66.6mil) and chemical tankers at US$62.7mil (RM189mil) due to weak outlook on these sectors.

“Regarding the delay on Gumusut Kakap floating production system, MISC has been levied for late penalty, which will be recognised by 2013,” it said.

On the flip side, HLIB said there could a potential writeback on its liner business provisions.

“MISC has specifically provided RM1.45bil (larger than previous guidance of RM1.2bil) for the potential losses of exiting the liner business.

“There is potential writeback should MISC able to realise its liner business at higher than the expected value,” it said.

Additionally, HLIB said MISC’s 66.5% subsidiary, Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) that handles the group’s heavy-engineering business, still had an orderbook of RM3.1bil that would last until 2013.

“And the acquisition of Sime Darby’s Pasir Gudang yard by MMHE is expected to be completed by the second quarter this year.

“MMHE recognised lower earnings mainly due to timing of revenue recognition,” it said.

In general, according to a shipping analyst, the situation at MISC could be worse if it was a purely shipping company, but MISC’s businesses were diversified in energy-related construction as well as offshore.

“This has kept the company afloat and weather the longer-than-expected storm that has hit the shipping industry globally.

“The situation at MISC may be clearer after the provisions, especially for its liner business, are finalised most probably by mid-year,” he said.

MISC in a recent statement accompanying its latest financial result admitted that the demand outlook for shipping remained weak.

“The supply-demand imbalance will continue to further depress and add volatility to petroleum and chemical freight rates. However, the group’s recent decision to cease its loss-making liner business operations is expected to benefit in the medium to long term,” said MISC.

“Meanwhile, LNG, offshore and the heavy engineering businesses will continue to provide stability to the group’s earnings. And no dividend has been proposed for this financial year.”