MISC Group (MISC)’s quarter one 2023 results came in with no surprises as core earnings surged 57% year-on-year thanks to stronger tanker rates and better offshore division in the absence of Mero 3’s cost provisions.
“We continue to like the company for its steady operating cash flow with the anticipation of a bump-up from Mero 3 starting mid-2024 and its undemanding valuation of 14x financial year 2023 future,” said RHB Research (RHB) in the recent Malaysia Results Review.
Quarter one 2023 core earnings of RM585 million came in within expectations, at 28% and 26% of RHB and Street full-year estimates. A first dividend per share of 7 sen was declared, as expected.
MISC recorded core profit of RM585 million in quarter one 2023 after stripping off USD12 million in Mero 3 construction gains, USD13 million one-off gain from the Vietnamese offshore asset contract extension and RM96 million in vessel impairments.
The weaker quarter-on-quarter performance was due to lower profit from its petroleum division which, in turn, was dragged by lower tanker rates and liquified natural gas (LNG) profit.
Quarter one 2023 core earnings surged by 57% year-on-year, on the stronger numbers from the petroleum and offshore divisions in the absence of the Mero 3 project’s cost provision recognised in quarter one 2023. This has masked a weaker contribution from the LNG unit.
The Mero 3 project was at 85% physical completion as of quarter one 2023, and is on track for delivery in May 2024. The term-to-spot ratio within the petroleum division increased to 84:16 in quarter one 2023 from 77:23 in quarter four 2022, as more Aframax vessels were put on term charters.
“With more vessels on term charters, we expect the petroleum division to deliver relatively more stable earnings. Two LNG vessels were delivered in January this year, with another 25%-owned 12 LNG vessels to be delivered in 2025-2026,” said RHB.
On the other hand, one LNG vessel contract has expired in quarter one 2023 with another two and three vessels due for expiry in second half 2023 and 2024. MISC will be considering various options including contract extension, re-deployment opportunities, among others, before scrapping these vessels.
Downside risks identified by RHB are the weaker-than-expected petroleum tanker rates, and unexpected contract cancellations of long-term contracts.
