MISC set to ride on heavy engineering ops

MISC Bhd’s robust heavy-engineering business is expected to buoy the company’s outlook going forward as its liner and tanker divisions face unfavourable headwind this year.
MISC’s heavy-engineering business is operated by 66.5%-owned subsidiary Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE). MISC, the world’s single-largest owner-operator of liquefied natural gas (LNG) tankers, is 62.4% controlled by Petroliam Nasional Bhd (Petronas).
According to UOB Kay Hian, MISC is confident of replenishing MMHE’s order book by RM3bil to RM4bil in the near term.
It said MMHE’s current outstanding order book fell to RM3.6bil from RM5bil in the previous quarter ended Sept 30, 2010.
A file picture shows a vessel in MMHE's dry dock in Pasir Gudang, Johor. MISC is expected to replenish MMHE's order book by RM3bil to RM4bil soon.
“We believe MMHE could be the next player to be involved in Petronas’ marginal field development. Given that marginal fields have short life spans of eight to nine years, MMHE could be awarded a contract to build floating production vessels to develop marginal fields.
“There are still five to six fields that have yet to be awarded by Petronas,” the research house said a report on Friday.
Despite the rosy outlook on MMHE, UOB Kay Hian said unfavourable headwind was confronting MISC liner and tanker divisions that pointed to a bleaker picture for this year.
Nevertheless, it said, direct participation in marginal fields via MMHE could be a saving grace for MISC.
UOB said MISC’s third quarter ended Dec 31, 2010 (Q3 FY11) core net earnings of RM267mil was significantly below its estimates and market expectations.
“The core net earnings for the quarter under review fell 35% quarter-on-quarter after netting a US$452mil gain on disposal of its 33.5% stake in MMHE’s initial public offering and impairment losses of US$38mil as assets value plunged,” it said.
Core net earning is the revenue derived from a company’s main or principal business less all associated expenses.
Similarly, AmResearch said MISC earnings for Q3 FY11 dropped by 93% quarter-on-quarter, led by liner losses which ballooned to RM220mil from RM97mil in the second quarter ended Sept 30, 2010.
“Losses from the liner division were more than expected. As for its nine-month performance of the current financial year ending March 31, the liner division registered operating losses of RM452mil.
“This is despite MISC’s move in pulling out of the Asia-Europe trade in late 2009,” the brokerage said in a recent report.
MISC was involved in the Asia-Europe trade via Grand Alliance, the world’s largest container shipping partnership. It pulled out from the alliance because Asia-Europe trade route was suffering from plunging freight rates then as a result of the global economic crisis.
UOB Kay Hian said the ongoing rationalisation of routes at MISC’s liner division would take time to yield results as MISC continued to reshape itself from a diverse shipping operator to an integrated energy-related shipping and offshore operator.
As for petroleum shipping performance in Q3 FY11, UOB Kay Hian said the losses widened after taking in new deliveries – three new Aframaxes and two in-chartered very-large crude carrier (VLCC) – pushing up depreciation charges and operating costs.
“Time chartered rates for VLCCs and Aframaxes are currently down 5% and 14% respectively from last quarter. Current Aftramax average earnings of US$9,000 per day is significantly below the long-term average of US$35,000 per day,” it said.
On supply and demand, AmResearch said global tanker deliveries that were delayed last year now seemed to be shifted to this year and 2012.
It said higher bunker cost, which is mainly consumed by the liner division, should kick in from the current quarter.
“Bunker fuel averaged at US$488 per tonne in Q3 FY11, about 10% increase from the previous quarter. As a comparison, bunker fuel now averages at US$571 per tonne, 17% higher than Q3 FY11 levels,” said AmResearch. Bunker costs account for 16% of MISC’s total costs.
In terms of liquefied natural gas (LNG) shipping, UOB Kay Hian said it might see better rates this year as global demand for LNG was expected to increase 8.2% because power companies were switching their feedstock from coal to LNG, a cleaner fossil fuel which has not risen in price as much as thermal coal.

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