AMBANK Research has downgraded shipping giant MISC Bhd to a hold from a buy recommendation on expectations of lower earnings for FY20 and FY21. The weaker results are anticipated from a two percentage point decrease in spot petroleum charter rates assumptions.
MISC will be announcing its 4Q19 results tomorrow (Feb 18) and AmBank Research is expecting the results to come in within expectations. This is because petroleum tanker rates generally improved in December 2019. Daily charter rates for Suezmax have risen 69% vs VLCC yoy, soaring 2.3x to US$95k and Aframax rates were up 52% to US$67k yoy even though the winter season in the northern hemisphere was rather mild.
The research firm said it had lowered its FY20-21 earnings assumption for the company due to a marginal cut in spot petroleum charter rates. It said the cut was in line with a sharp reduction in petroleum charter rates since the beginning of the year. The Worldscale flat rates for the Arabian Gulf to Japan shed 70% to the WS40 level currently while the rates for Arabian Gulf to US Gulf Coast (USGC) has declined by some 55%.
Worldscale, published by the Worldscale Assocaition (London) Limited and the Worldscale Association (NYC) In, is a unified system of establishing an average total tanker cost of shipping oil from one port to another.
“Yoy, the Worldscale flat rate for the Arabian Gulf-Japan route is down 6% while the Arabian Gulf-USGC is still up 62% partly due to the International Maritime Organisation’s (IMO) 2020 regulations on sulphur emissions cap rate at 0.5% on marine fuels,” said AmBank.
The research firm said although the term to spot ratio for MISC had declined from 65:35 to 60:40, MISC is still susceptible to lower charter rates. It estimates that a 10% decrease in spot charter rates can reduce the company’s FY20 earnings by 8%.
MISC’s offshore business could be affected by delays in the award of projects as Brent oil prices have dipped below the US$60 per barrel threshold. In addition, growth outlook could also be dampened by the outbreak of Covid-19.
AmBank has a fair valuation of RM8.80 for MISC which implies a FY20F EV/EBITDA of 10x on par with its three-year average and 40% premium to AP Moller Maersk.
At 11.50am today, MISC shares were traded at RM8.02, down five sen from Friday’s close with 39,600 shares changing hands. – Feb 17, 2020
