Hopes for 2H22F tanker freight rate recovery
? FY21 core net profit was in line at just 1.5% higher than our forecast, but was 11% above consensus as AET (the tanker arm) turned profitable for 4Q21.
? Reiterate Add with higher SOP-based TP of RM7.99 on the back of a stronger US$; re-rating catalysts include potential rise in tanker freight rates.
? Crude oil production may pick up in 2H22F from non-OPEC countries like the US, Canada and Brazil; shipping demand will benefit from a US-Iran détente.
4Q21 core net profit up 15% sequentially; FY21 down 2.9% yoy
MISC saw its 4Q21 core net profit rise 15% qoq, as the extension of three FPSO contracts resulted in the booking of upfront finance lease profits, while the sequential improvement in crude tanker freight rates helped AET turnaround from a pretax loss in 3Q21 to a pretax profit in 4Q21. The sequential improvement in profits would have been stronger if not for MMHE’s provision for foreseeable losses on one of its fabrication projects (due to Covid-19 related delays), and a lumpy accrual for FPSO Mero-3 construction costs after certain milestones were achieved (which MISC claimed was planned and not unexpected). For the same reasons, MISC’s 4Q21 core net profit moderated 3.8% yoy, offsetting the positive earnings impact from the commissioning of six VLECs at the start of 2021, and AET’s return to profitability. On a full year basis, FY21 core net profit was marginally down by 2.9% yoy, with higher MMHE losses due to provisions for loss-making projects and lower AET profits more than offsetting the contribution from the six VLECs and the rise in FPSO Mero-3 construction profits.
We forecast FY22F core net profit to rise 20% yoy
Looking forward into this year, we think that MISC may be able to deliver 20% core net profit growth from the FY21 base. MISC said that its kitchen-sinking exercise at MMHE for expected loss-making heavy engineering projects was completed last year, and losses should shrink this year. If Malaysia’s international borders open to quarantine-free entry for fully-vaccinated travellers by mid-2022F, MMHE’s ship repair business may improve. The delivery of five shuttle tankers in 1H22F and one in 2H22F may boost AET’s profits, while a tanker freight rate recovery may be possible in 2022F. FPSO Mero3 construction profits may also pick up this year, as the project was only 33% complete at end-2021 (slightly behind schedule), with delivery earmarked for late-2023F.
Will tanker freight rates have their time in the sun?
Shipbroker Clarksons forecasts crude tanker demand to increase 7.2% in 2022F, after shrinking 2.7% in 2021 on the back of Chinese destocking after it had accumulated substantial inventories in 2020. With Chinese stock levels now low, incremental demand will have to be met from new imports. Meanwhile, Clarksons expects the tanker fleet to rise by 3.9% yoy this year, below the pace of demand growth. Growth in non-OPEC crude production from the US, Canada and Brazil may result in more long-haul tanker shipments to Asia, while Iran may also return to the export market if negotiations with the US on the nuclear deal are successful. Downside risk: delays in Mero-3 construction