Sunday, June 16, 2013

About MISC

MISC decided to cease its liner operations as the division was plagued by overcapacity and low freight rates. The combination of those two factors dragged MISC's bottomline into the red for two consecutive quarters ended Dec 31, 2011 and March 31, 2012.

The disposal of its liner business enabled it though to curb losses and create debt headroom, thus allowing the group to tap additional borrowings if needed.

MISC also managed to monetise one of its biggest investment assets to date, the Gumusut-Kakap Semi-Floating Production System with the disposal of its 50% equity interest in GKL That saw the shipping company raise RM5.3bil for the group without seeking additional capital from shareholders or raising further debt.

For 2013, after two offers by its major shareholders to take the company private were unsuccessful, MISC surprised the market with a healthy enough profit for its first quarter ended March 31 2013.

Petronas would have to wait 12 more months from April 2013 before it could launch any new takeover bid for MISC. The EPF is now (May 2013) taking a wait and see attitude on Petronas plans to privatize MISC Bhd. EPF which held a 9.5% stake in MISC as of April 12 2013 has accepted Petronas’ revised offer price of rm5.50 per share from rm5.30.

But is that momentum sustainable to keep the shipping company profitable going forward as two of its divisions, namely the chemical and petroleum tankers, are still loss-making?

Besides this, MISC other businesses in liquefied natural gas shipping, offshore, heavy engineering and tank terminal business are profitable.

The shipping company is on a recovery path towards better profitability. MISC has started on a sustained recovery path. Although petroleum and chemical shipping are likely to remain in the red over the next few quarters, losses are expected to narrow.

MISC chemical division's losses narrowed by 47% in the first quarter of 2013 from a year ago. Stronger demand and slowdown in new vessel deliveries led to higher chemical freight rates.

Losses should continue to fall in the coming quarters on improving supply demand dynamics.

The Gumusut-Kakap facility is completed and testing is in progress. Maiden contributions from this project will help support earnings in the second half of 2013.
The Gumusut-Kakap field is Malaysia's second deepwater development after Kikeh and is expected to produce about 150,000 barrels of oil per day. It is operated by Sabah Shell Petroleum Co, partnering with Murphy Sabah Oil Co, Conoco Philips Sabah and Petronas Carigali.

Market observers upgraded MISC's financial year 2013 (FY13), FY14 and FY15 net profit forecast by 20%, 14% and 14% respectively. This are due to stronger chemical rates, lower cost from the petroleum division that offsets lower forecast for MMHE and de-consolidation of two offshore business units from adoption of Malaysia Financial Reporting Standards 10 and 11.

Expect strong earnings growth over 2013 to 2015, on the back of significantly narrowing or absence of container losses and steady strengthening of LNG as well as oil and gas earnings. This is despite factoring in continued losses for the petroleum and chemical shipping segments for the next two years.

MISC returned to the black in FY12. For the first quarter of this year, it locked in a net profit of RM300.4mil against a net loss of RM469.82mil a year ago, on the back of RM2.38bil in revenue. Revenue increased 7.6% from RM2.21bil in the previous corresponding quarter.

MISC's performance should improve in the next few quarters from May 2013 as the company completes the construction of its Gumusut project in July 2013 and the charter rates for its vessels, especially in petroleum segment, stabilise towards the end of 2013.

Although the buyout offer from its parent Petronas did not succeed, it reinforces its close business links with, and strong parental support for, MISC, both of which are key credit strengths that provide a three-notch uplift included in MISC's current Baa2 rating.

The stable outlook reflects Moody's expectation that the company will not undertake any major debt-funded capital expenditure over the next two to three years from 2013, which would have increased its business risk and that its credit metrics will remain within the tolerance level for its ratings.

On its tank terminal business, MISC is in equal joint-venture with Vitol group via VTTI B.V. The company will invest another RM1bil or so for the second phase of development of its ATT Tanjung Bin (ATB) oil storage terminal in Tanjung Bin, Johor.

In 2009, MISC partnered VTTI, a wholly-owned subsidiary of Vitol and one of the world's biggest energy traders, to develop ATB. This eventually led to MISC acquiring a 50% stake in VTTI for US$840mil (RM2.55bil) in 2010, transforming it into a global player in the tank terminal business in the process.

VTTI was yet to be a substantial component of MISC's business portfolio relatively in terms of income contribution. But it is positively contributing as it recognised 50% of VTTI's profit. It will be a substantial component in MICS’s business portfolio by 2015 when VTTI and ATB expand.

Another positive factor is the weakening bunker price (May 2013) which constitutes 27% of its operating cost.

Despite the rosy outlook, MISC is prepared to weather another year of rough tides in the shipping sector and will continue to revise its business portfolio to manage its financial resources and capital allocation.

Since the onset of the global financial crisis in 2009 and the resulting downturn of the economy had been a challenging but exciting period for the company. However there is some light at the end of the tunnel as the company had managed to remain profitable since the middle of last year after two consecutive quarters of losses.

The worst fiscal period for MISC is over as its first quarter results are promising and meets expectations. MISC’s management cited possibility of paying dividend for 2013 on expectations of am improving outlook. The worst is over for MISC from May 2013 …

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