MISC shares on the rise, but analysts cautious on its prospects and outlook of shipping

By Star Online: Business
13 July 2012

PETALING JAYA: MISC Bhd's share price has been on the rise since it fell to a low of RM3.87 on June 5.

Since then, the share price had risen 19.6% or 76 sen to its closing at RM4.63 yesterday. Analysts believe the run-up was due to retracement in bunker costs leading to potential improvement in margins.

Earlier in May the company announced losses of RM465mil for the first quarter ended March 31, 2012 (Q112) due to lower operating profit generated. Despite the recent run-up of its share price, analysts remain cautious on the outlook of the company's prospects and industry.

In a Kenanga Research note, analysts said: “We believe it will continue to be plagued by several factors that are now affecting the shipping industry, namely sluggish charter rates, unyielding bunker costs and a continuous overcapacity.”

Since the cessation of its liner business in November last year, MISC is fully focused on its energy transportation business. The liquefied natural gas (LNG) transportation market provides a stable income for the company due the long-term nature of contracts it secures. These contracts are typically between 15 and 20 years.

Stable earner: An MISC LNG tanker. The LNG transportation market provides a stable income for the company due to the long-term nature of the contracts it secures.

The decision to cease its liner business caused the company major losses arising from provisions and writedowns for the division. In the financial year ended Dec 31, 2011 (FY11), it made a one-off provision of RM1.5bil for the business, while in Q1'12, MISC made an additional provision of RM220.5mil.

The company announced to Bursa Malaysia last month that it would no longer make any more provisions or writedowns for the division.

OSK Research analysts estimate that MISC may see a writeback of the provisions amounting to at least US$174mil (RM555mil). The provision, which had earlier totalled US$546.3mil (RM1.7bil) was raised from the sale of 10 container vessels, with the remaining six older vessels likely to be scrapped.

It is understood that the liners, which were sold at more than 50% discounts over last year's prices, were taken up by Costamare and Capital Ship Management of Greece, and Sea Consortium.

In a report, OSK Research said MISC's exit from the liner business would drive profits going forward, as the segment was accumulating pre-tax losses totalling US$1.04bil (RM3.32bil) over the past 20 quarters. “The book value boost from the writeback will add 12 sen to MISC's book value per share, which is slightly positive for the stock as its valuation has hit rock-bottom,” it said.

MISC currently has a fleet of 27 LNG ships.

Future growth for the division will come from three sources. Firstly, two floating storage units (FSUs) will begin their 20-year charter to Petronas Gas Bhd in Aug 2012. Furthermore it may provide nine additional LNG ships for Petronas Gas's requirements in Gladstone and Bintulu.

CIMB Research said: “We view MISC's chances here as very high given its traditionally close relationship with Petronas.”

The shipping and maritime conglomerate is also bidding for various other LNG shipping contracts with non-related oil majors in Australia and elsewhere.

CIMB Research analysts opine that although is competing with other shipping players, MISC has a fair chance of winning.

Kenanga analysts said in a report that bunker costs are still generally trending upward compared to tanker charter rates, which seem to be moving sideways. “We also understand that forward charter rates will very likely be capped by the newbuilding surplus that will stretch till 2014,” it said.

Risks to the company include the possibility of further impairments to its chemical and, or tanker fleet as freight rates are expected to remain weak and volatile for a few years.

“MISC still lacks strong share price catalysts as it is still operating in a very tough shipping environment of low freight rates. Its tanker and chemical shipping division is expected to be loss-making for at least a few years although the group as a whole is likely to stay profitable due to strong LNG earnings,” CIMB Research said.

The company had said earlier that the LNG market remains favourable with optimistic demand for gas energy in Japan.

OSK Research said the company guided that the last of the operation losses for the next one or two quarters would range between US$50mil (RM159mil) and US$60mil (RM191mil).

[Source]