21 May 2012
Its earnings have hit bottom, seen to improve in coming quarters
IT will get worse before it gets better. That pretty much sums up what MISC Bhd, the world's single-largest owner-operator of liquefied natural gas (LNG) tankers, has experienced when its recent ballooning losses caught everybody by surprise.
MISC suffered a net loss of RM465.1mil in its first quarter ended March 31 compared with a net loss of RM307.9mil a year earlier on the back of lower revenue, which slipped to RM2.4bil from RM2.9bil previously.
Nevertheless, many quarters have predicted that MISC is bottoming out and would progressively sail out of choppy waters in the next quarter.
The huge loss for the quarter stemmed from a surge in core liner or container shipping losses due to one-off settlement costs as it exit the business.
According to CIMB Research, the surprise concerns the massive core losses incurred by the liner division of US$101mil or RM316.7mil (excluding provision), against its full-year loss forecast of just US$50mil (RM156.8mil).
“MISC incurred numerous settlement charges or penalties to cancel contracts, which we initially assumed was part of the liner exit provision'. MISC has ceased majority of its trade routes and would fully exit the liner business by mid-year,” it said in a recent report.
MISC’s liner business could be considered that of a mid-sized player. It owns 16 container ships, with the biggest having the capacity to carry more than 5,000 twenty-foot equivalent units (TEUs) and the smallest at about 1,000 TEUs
CIMB Research believes that MISC's earnings have hit bottom and most of the negatives surrounding the stock may have already been priced in.
“Compared with the previous quarters, we noted a tinge of optimism in management's outlook for several divisions,” it said in a recent report which had upgraded the call on the counter to “neutral”.
MISC's liner business could be considered that of a mid-sized player. It owns 16 container ships, with the biggest having the capacity to carry more than 5,000 twenty-foot equivalent units (TEUs) and the smallest at about 1,000 TEUs.
Globally, MISC is more renowned for its energy shipping business LNG, petroleum and chemical tankers. The company is also involved in offshore operations, marine and heavy engineering, integrated logistics and maritime education.
“We concur with that view and expect future quarters to improve. However, the shipping environment remains tough and the structural overcapacity for the tanker market will last until at least 2013.
“It is unlikely that we will see huge losses in the coming quarters. MISC has guided for a loss of US$20mil or RM62.7mil per quarter for the return of container boxes and also vessel laid-up costs until the vessels are delivered to buyers. We are now assuming US$160mil or RM501.8mil core loss for financial year 2012 and none for 2013,” it said.
On hindsight, it was not an easy decision for MISC to exit the liner business, an important segment of world trade transportation, but it was a sensible business decision.
This decision was made after several attempts to salvage and restructure the sinking segment failed.
A casualty of a market slump and overcapacity, troubles in the container shipping globally started in early 2009 as a result of the global economic downturn.
Since then, the container shipping market started to see new capacity coming onboard from large orders placed in 2004 when the segment was booming.
Overcapacity and a prolonged trade slump since early 2009 proved to be a bad combination as it pushed freight rates to historic lows and forced some companies to cancel orders or delay delivery of ships.
MISC restructured its liner business in January 2010 when it got out of the Far East-Europe trade services (the worst hit by the economic crisis) to re-focus on an intra-Asian model.
However, the rapid pace at which the industry was changing, led by the push for new investments into larger vessels in order to maximise economies of scale and to realise greater cost efficiency, came at a time when the industry was being plagued by overcapacity and operators were struggling to stay afloat.
And MISC is not alone in this abyss of container business, where even the giants of this segment were also sinking albeit a recovery seen recently.
The liner industry might see a loss of US$5.2bil before interest and taxes last year, said London-based Drewry Shipping Consultants Ltd in a Jan 4 report.
For a player like MISC, it is better to completely exit than to stay and compete with the giants where they have the upper hand of owning bigger ships and higher economy of scale.
So, besides exiting the liner business, what would keep MISC afloat in the future?
According to Maybank IB Research, the LNG division would continue to anchor earnings, supplemented by contributions from the heavy engineering business via 66.5%-owned Malaysia Marine and Heavy Engineering Holdings Bhd (MMAHE), offshore and tank terminal operations.
“LNG demand has improved post-Japan's March 2011 earthquake/tsunami. This has been reflected in the step-up in spot rates of US$120,000 to US$140,000 a day. Long-term daily charter rate remains at around US$70,000.
“For MMHE, the group is looking at higher order backlogs after the acquisition of Sime Darby's Pasir Gudang yard. It is also in an entrenched position to secure Shell's Tension Leg Platform project,” it said.
Maybank IB has upgraded its call on the stock to “hold” from “sell”.
As for the chemical and petroleum tankers divisions, although they were still in the red for the first quarter, both had narrowed their losses on a quarter-on-quarter basis.
[Source]
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