CIMB Research maintains Underperform on MISC

KUALA LUMPUR: CIMB Equities Research maintains its Underperform recommendation on MISC BHD [] with lower target of RM7.50 after its nine-months core net profit, for the period ended Dec 31, 2009, was only 43% of both its full-year forecast and consensus.

It said on Thursday, Feb 25 that the 3Q performance was the sixth straight quarter of results underperformance, principally because liner losses were much larger and tanker earnings declined much faster yoy than forecast. As expected, no dividend was declared.

"We have cut our EPS forecasts by 5.4% for FY10 and 11-12% for FY11-12 as we incorporate the 744 million new shares from the recently concluded RM5.2 billion rights issue. As a result, our target falls from RM8.50 to RM7.50, still based on our target market P/E of 15 times," it said.

CIMB Research flagged the possibility of another 10%-30% earnings cut after today’s analyst briefing, which may lead to a further downgrade of its target price. Potential de-rating catalysts include the poor results and potentially large liner losses even in CY2010.

It said there was no sequential improvement in operating profit. Although 3Q core net profit soared 67% quarter-on-quarter (-32% year-on-year), it resulted from lower tax expense and minority interest. More importantly, MISC’s operating profit was flat QoQ and down around 40% YoY. This was because the energy shipping group (LNG, petroleum and chemical tanker) eked out just 2% QoQ growth and losses for the integrated liner logistics segment narrowed only 3% QoQ.

These were easily offset by a 13% QoQ decline in profits from the offshore and heavy engineering group.

"Liner losses may exceed guidance. During last quarter’s briefing, MISC reiterated that the liner segment’s losses for this financial year should not exceed last year’s RM900 million loss. However, we suspect that the company may have already exceeded that threshold after the 3Q results," it said.