MISC. Company Guide. Working hard to stay shipshape. Malaysia Equity Research 3 Nov 2016

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1 Version 4 Bloomberg: MK Reuters:.KL Refer to important disclosures at the end of this report Malaysia Equity Research 3 Nov 2016 HOLD Last Traded Price ( 2 Nov 2016): RM7.50 (KLCI : 1,659.60) Price Target 12-mth: RM7.60 (1% upside) (Prev RM7.60) Shariah Compliant: Yes Potential Catalyst: Upturn in shipping rates Where we differ: Thinner margin assumptions than consensus Analyst Marvin KHOR marvinkhor@alliancedbs.com What s New 3Q16 performance dipped more than expected on weak petroleum shipping rates Charter rate outlook still soft, but seasonality picking up for petroleum division in 4Q Trim FY16/17/18F core earnings by 11%/11%/7%, RM7.60 TP stays on weaker RM maintain HOLD Price Relative RM Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 (LHS) Relative KLCI (RHS) Relative Index Forecasts and Valuation FY Dec (RM m) 2015A 2016F 2017F 2018F Revenue 10,908 9,723 10,306 11,374 EBITDA 4,428 4,985 5,315 5,576 Pre-tax Profit 2,567 3,074 2,398 2,605 Net Profit 2,468 2,998 2,325 2,527 Net Pft (Pre Ex.) 2,645 2,151 2,325 2,527 Net Pft Gth (Pre-ex) (%) 42.0 (18.7) EPS (sen) EPS Pre Ex. (sen) EPS Gth Pre Ex (%) 42 (19) 8 9 Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): (10) (11) (7) Consensus EPS (sen): Other Broker Recs: B: 5 S: 3 H: 7 Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P Working hard to stay shipshape Growth outlook still tepid. The continuing softness in LNG and petroleum shipping rates are set to be a dampener for nearterm profitability. While earnings from the group s fleet on contracts are expected to remain secure, new charters to replace earlier terminations could be signed at lower rates given the large supply of vessels available. The group continues to seek opportunities in the offshore space, though we think finding a short-term re-rating catalyst may be a challenge. Maintain HOLD. Supply growth poses challenge for charter rates. Charter rates for petroleum tankers averaged c.12% lower y-o-y in 9M16, as global fleet growth picks up after bottoming out in Stronger seasonal demand, which picks up during the 4Q-1Q period, will be necessary to lift overall rates. On the other hand, spot LNG shipping rates, which had halved in 2015, looks to continue being depressed as vessel supply continues to outstrip demand. Valuation supported as dollar strength proxy. s functional currency and key assets are denominated in US dollar, though it reports earnings in ringgit. We have revised our average FY17/18F USDMYR forecasts of 4.22/4.37 from 4.10/4.10. A weaker ringgit presents upside risks to reported earnings and valuations and vice versa. Valuation: Our SOP-derived TP for is RM7.60, which implies 0.9x FY17F P/BV. Given the limited upside, we maintain our HOLD recommendation. Key Risks to Our View: Severe changes in crude petroleum shipping rates. Our assumptions are for crude shipping rates to see a decline on average in If rates move severely due to volatility in crude oil prices, earnings will be impacted. At A Glance Issued Capital (m shrs) 4,464 Mkt. Cap (RMm/US$m) 33,478 / 7,995 Major Shareholders (%) Petroliam Nasional Bhd 62.7 Employees Provident Fund 6.6 Skim Amanah Saham Bumiputera 5.6 Free Float (%) m Avg. Daily Val (US$m) 4.0 ICB Industry : Industrials / Industrial Transportation Refer to important disclosures at the end of this report ed:ck / sa: BC

2 WHAT S NEW Petroleum rate weakness hit 3Q16 earnings Depressed quarter. reported a sharply lower 3Q16 headline profit of RM134.2m (-72% y-o-y, -90% q-o-q). After stripping out RM164m of impairment provisions, and RM50m of other exceptional net losses, core earnings were still depressed at RM348.2m (-51% y-o-y, -31% q-o-q). 9M16 core earnings thus reached RM1.48bn (-25% y-o-y), which is below our/consensus expectations. Petroleum shipping rates met trough in 3Q. The main culprit for the weaker performance was the Petroleum shipping division (including its Chemical fleet), whose revenue fell 9% y-o-y in USD terms due to a more severe seasonal rate decline than This, in addition to the higher depreciation costs incurred with its revised policy, led to the segment posting a USD27.7m pretax loss. Note that the Baltic Dirty Tanker Index (BDTI, proxy for charter rates) had slid 22% y-o-y in 3Q16 (see chart overleaf). Limited cushioning from other segments. The LNG segment revenue also saw topline fall 13% y-o-y (-4% q-o-q) in USD terms due to lower vessel days, as more of its fleet are not on jobs with the Puteri Zamrud going for refurbishment after contract expiry. Recall that it also has two Aman class vessels with terminated contracts and two more laid up due to unrest in Yemen. Resultantly LNG PBT fell 35% y-o-y to USD56.2m (-10% q-o-q). Offshore PBT fell 38% y-o-y to USD24.2m, though this was due to a USD20m reversal of gains in FPSO Cendor s finance lease. The heavy engineering division MMHE continued to be loss-making (USD0.6m). Supply-demand factors remain key issue. In its earnings call, continues to highlight a lukewarm rates outlook for the main LNG and petroleum shipping divisions. In particular, vessel supply for both divisions is set to expand in 2017 (see charts overleaf). Efforts made for longer-term growth, expect better 4Q in the meantime. The group notes that organic LNG shipping demand will continue be lower than supply over the coming years, and will seek to find non-conventional demand to augment it such as FSRU (Floating Storage Regasification Unit) work. Its Offshore division will be entering the Thai market with the FSO Benchamas project starting 2Q18, for which the petroleum tanker Bunga Kelana5 will be converted. It will explore opportunities in the West Africa and Brazil region where planned projects are more rife. Looking at the nearer term, 4Q16 is poised to be stronger as year-end seasonal demand kicks in for its Petroleum segment. The BDTI had risen 5% over Oct 16, and is 32% higher than the lowest point in Aug 16. Trimming forecasts, weaker ringgit provides lift. We adjusted our assumed blended petroleum rates for a -10%/-2% decline from -5%/0% for FY16/17F previously to account for weaker charter rates. However, we also incorporate a weaker ringgit against the USD, of 4.22/4.37 in CY17/18F from 4.10/4.10 as per DBS forecasts. Overall, our core earnings forecasts are cut 11%/11%/7% for FY16/17/18F, and headline earnings lowered 10%/11%/7%. Rolling forward our valuations to FY17, our TP is maintained at RM7.60 largely due to the weaker ringgit assumption. Maintain HOLD. Quarterly / Interim Income Statement (RMm) FY Dec 3Q2015 2Q2016 3Q2016 % chg yoy % chg qoq Revenue 2,506 2,392 2,293 (8.5) (4.2) Cost of Goods Sold (1,598) (1,656) (1,781) Gross Profit (43.6) (30.5) Other Oper. (Exp)/Inc (288) (231) (138) (52.2) (40.2) Operating Profit (39.6) (26.0) Other Non Opg (Exp)/Inc nm nm Associates & JV Inc (63.6) (31.5) Net Interest (Exp)/Inc (40.3) (63.8) (68.1) (69.0) (6.8) Exceptional Gain/(Loss) (231) 841 (214) 7.5 nm Pre-tax Profit 519 1, (70.2) (88.7) Tax (15.2) (19.4) (11.2) (25.9) (42.0) Minority Interest (20.6) (8.2) (9.2) Net Profit 484 1, (72.3) (90.0) Net profit bef Except (51.3) (31.2) EBITDA 1,156 1, (17.7) (12.9) Margins (%) Gross Margins Opg Profit Margins Net Profit Margins Source of all data: Company, AllianceDBS Page 2

3 Petroleum tanker fleet growth Source: Company presentation LNG shipping rates and vessel deliveries Source: Company presentation Baltic Dirty Tanker Index 1,200 Baltic Dirty Tanker Index 1,100 1, Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Source: Bloomberg L.P. SOP valuation Value (RM m) Per share (RM) Valuation basis LNG Shipping 16, x FY17F EV/EBITDA, net MI Petroleum Shipping 7, Estimated market value Chemical Shipping Estimated market value Equity Value - Energy related shipping 24, Energy-related shipping 24, Refer to above Offshore 8, x FY16F earnings Heavy Engineering 1, Based on market price Tank Terminals % stake of Langsat 1&2, WACC Bintulu Port stake (2.3%) Based on market price Total SOP Equity Value 33, Page 3

4 CRITICAL DATA POINTS TO WATCH Earnings Drivers: Slow increase in LNG fleet. The LNG (liquefied natural gas) segment is s largest contributor at over 25% of topline and >50% of pretax earnings. It owns a fleet of 28 as at end- Sep 16, comprising 26 LNG carriers and two floating storage units (FSUs). Four newbuilds are due to enter the fleet over 1H17-1H18 on novated charters to Petronas. However, four vessels (Puteri class) are due to be dry-docked for around 6-9 months each during for refurbishments before their lease extensions. We assume the total active months from LNG vessels to change by -4%/+19%/11% over FY16/17/18F. Average LNG charter rates to trend down. s LNG fleet is largely on longer-term charters (15-20yrs), mostly to various units of Petronas. Hence, LNG earnings are less affected by the plunge in spot charters since Nonetheless, we understand that the five refurbished vessels will be on lower rates than before due to their age, while the five newbuilds are likely to see lower rates give current conditions. As such, we assume average revenue/vessel month will see a gradual decline of 10.5%/0.9%/0.3% over FY16/17/18F. Steady crude tanker rates. s petroleum segment profitability depends on the charter rates for the crude tankers (i.e. Aframax, Suezmax, VLCC). As new tanker deliveries are picking up in 2016, we assume average charter rates to change -10%/-2%/0% in FY16/17/18F. Rates are tracked via the Baltic Dirty Tanker Index (i.e. spot freight rates), and seasonality comes into play as crude oil shipping demand is weighed towards 4Q- 1Q of each calendar year. Keeping a lean chemical fleet. had reduced its chemical tanker fleet significantly from 29 vessels in 2012 to only 14 at end-2015, and through the process trimmed losses from the division. It plans to maintain the size of its fleet, and earnings may be closer to break even if bunker costs continue to be benign due to low crude oil prices. USD exchange rate has an impact on earnings. s businesses are generally transacted in USD but its financials are reported in ringgit. As such, a stronger USD would lift reported earnings and vice versa. Our current estimates impute DBS economic teams forecasts of RM4.10/4.22/4.37 to the USD for FY16/17/18F LNG - # of vessels months LNG - Revenue/vessel months (USD m) Petroleum - Revenue / m DWT (USD m) Chemical - Average # of vessels RM/USD Source: Company, AllianceDBS Page 4

5 Balance Sheet: Keeping a healthy gearing level. ended FY15 with net gearing of only 0.02x or almost net cash. This is projected to rise to 0.15x at end FY16F largely due to the GKL stake acquisition, after assuming GKL s debt as well as a small portion of its cash outlay to be debt-funded. Gearing level should then start to trend down due to the strong cash generation of its businesses. Share Price Drivers: Inorganic growth opportunities. remains open to acquisition opportunities, particularly in the oil & gas sector given distressed valuations. Avenues for organic earnings growth have largely petered out as the petroleum segment has firmly turned around, chemical segment losses have been curtailed, and there are limited contract win opportunities in the LNG shipping and offshore segments (because of the tough operating environment). As such, would have to rely on inorganic growth opportunities in order to lift earnings. Leverage & Asset Turnover (x) Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure RMm 3, , , , , , Key Risks: Fall in crude petroleum shipping rates. The petroleum tanker market is conducted mostly on spot or short to medium charters of 1-3 years. As such would be more susceptible if tanker rates see a sustained downtrend. Further charter cancellations. The LNG segment will be more exposed to current weak spot charter rates if long term charters are terminated. Persistence of a strengthening ringgit. s earnings in ringgit (reporting currency) will drop if the USD weakens significantly against MYR. 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% (x) 21.3 Capital Expenditure (-) ROE (%) Forward PE Band (x) Company Background is Petronas shipping arm, operating vessels capable of LNG, petroleum and chemical transport. Other businesses include offshore O&G assets, marine engineering (via listed MMHE) and tank terminal operations sd: 18.4x sd: 16.4x 15.3 Avg: 14.4x sd: 12.4x sd: 10.4x 9.3 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 (x) 1.6 PB Band (x) sd: 1.31x +1sd: 1.19x Avg: 1.07x -1sd: 0.95x -2sd: 0.83x 0.7 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Source: Company, AllianceDBS Page 5

6 Key Assumptions FY Dec LNG - # of vessels months LNG - Revenue/vessel months (USD m) Petroleum - Revenue / m DWT (USD m) Chemical - Average # of vessels RM/USD Segmental Breakdown FY Dec Revenues (RMm) Energy related shipping 6,303 7,523 7,094 7,777 8,573 Offshore 514 1,006 1,304 1,309 1,324 Heavy Engineering 2,136 1,826 1,121 1,220 1,478 Others Total 9,296 10,908 9,723 10,306 11,374 PBT (RMm) Energy related shipping 1,356 2,145 1,365 1,541 1,745 Offshore Heavy Engineering Tank terminals Others Total 2,149 3,129 2,227 2,398 2,605 PBT Margins (%) Energy related shipping Offshore Heavy Engineering Others N/A N/A Total Income Statement (RMm) FY Dec Revenue 9,296 10,908 9,723 10,306 11,374 Cost of Goods Sold (6,651) (7,528) (6,588) (6,853) (7,612) Gross Profit 2,645 3,380 3,135 3,453 3,763 Other Opng (Exp)/Inc (953) (1,042) (967) (1,037) (1,165) Operating Profit 1,692 2,338 2,168 2,416 2,598 Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (234) (180) (251) (341) (325) Exceptional Gain/(Loss) 341 (177) Pre-tax Profit 2,410 2,567 3,074 2,398 2,605 Tax (90.3) (31.8) (19.6) (18.5) (20.7) Minority Interest (116) (67.3) (56.2) (54.8) (57.8) Preference Dividend Net Profit 2,204 2,468 2,998 2,325 2,527 Net Profit before Except. 1,863 2,645 2,151 2,325 2,527 EBITDA 3,556 4,428 4,985 5,315 5,576 Growth Revenue Gth (%) (10.9) EBITDA Gth (%) Opg Profit Gth (%) (7.3) Net Profit Gth (Pre-ex) (%) (18.7) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Source: Company, AllianceDBS Page 6

7 Quarterly / Interim Income Statement (RMm) FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 2,506 3,312 2,394 2,392 2,293 Cost of Goods Sold (1,598) (2,280) (1,600) (1,656) (1,781) Gross Profit 907 1, Other Oper. (Exp)/Inc (288) (377) (40.9) (231) (138) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc (40.3) (96.8) (47.7) (63.8) (68.1) Exceptional Gain/(Loss) (231) 36.0 (52.5) 841 (214) Pre-tax Profit , Tax (15.2) (10.7) 14.7 (19.4) (11.2) Minority Interest (20.6) 0.33 (224) (8.2) (9.2) Net Profit , Net profit bef Except EBITDA 1,156 1,239 1,388 1, Growth Revenue Gth (%) (3.6) 32.2 (27.7) (0.1) (4.2) EBITDA Gth (%) (0.2) (21.3) (12.9) Opg Profit Gth (%) (7.9) (32.9) (26.0) Net Profit Gth (Pre-ex) (%) (3.8) 0.2 (13.0) (18.9) (31.2) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (RMm) FY Dec Net Fixed Assets 20,514 25,444 34,416 33,740 32,556 Invts in Associates & JVs 6,251 4,687 2,227 2,550 2,883 Other LT Assets 5,405 6,661 6,640 6,619 6,598 Cash & ST Invts 4,839 5,656 5,816 6,892 8,702 Inventory Debtors 3,409 4,888 3,996 4,235 4,674 Other Current Assets Total Assets 41,584 47,539 53,273 54,221 55,617 ST Debt 1,149 1,110 1,110 1,110 1,110 Creditor 3,401 3,817 3,249 3,380 3,754 Other Current Liab LT Debt 7,590 5,394 10,316 10,316 10,316 Other LT Liabilities Shareholder s Equity 27,756 35,361 36,686 37,448 38,413 Minority Interests 1,065 1,098 1,154 1,209 1,266 Total Cap. & Liab. 41,584 47,539 53,273 54,221 55,617 Non-Cash Wkg. Capital 1,132 1, ,014 1,100 Net Cash/(Debt) (3,900) (849) (5,609) (4,534) (2,724) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Source: Company, AllianceDBS Page 7

8 Cash Flow Statement (RMm) FY Dec Pre-Tax Profit 2,410 2,567 3,074 2,398 2,605 Dep. & Amort. 1,253 1,503 2,507 2,576 2,646 Tax Paid (102) (80.9) (19.6) (18.5) (20.7) Assoc. & JV Inc/(loss) (611) (587) (310) (323) (333) Chg in Wkg.Cap. (1,434) (102) 349 (116) (85.8) Other Operating CF 1, Net Operating CF 2,846 4,117 4,753 4,517 4,812 Capital Exp.(net) (1,082) (3,103) (3,289) (1,880) (1,440) Other Invts.(net) Invts in Assoc. & JV 668 3, Div from Assoc & JV Other Investing CF Net Investing CF (177) 510 (3,289) (1,880) (1,440) Div Paid (402) (592) (1,674) (1,562) (1,562) Chg in Gross Debt (1,981) (3,845) Capital Issues Other Financing CF (437) (247) Net Financing CF (2,819) (4,684) (1,304) (1,562) (1,562) Currency Adjustments Chg in Cash ,074 1,810 Opg CFPS (sen) Free CFPS (sen) Source: Company, AllianceDBS Target Price & Ratings History 4 5 RM Nov-15 Mar-16 Jul-16 Nov-16 S.No. Date of Report Closing Price 12-mth T arget Price Rating 1: 05 Nov BUY 2: 15 Dec BUY 3: 10 Feb BUY 4: 25 Feb BUY 5: 02 Mar BUY 6: 04 Apr BUY 7: 25 Apr BUY 8: 04 May BUY 9: 09 May HOLD 10: 10 May HOLD 11: 03 Jun HOLD 12: 19 Jul HOLD 13: 05 Aug HOLD Note : Share price and Target price are adjusted for corporate actions. Source: AllianceDBS Analyst: Marvin KHOR Page 8

9 DISCLOSURE Stock rating definitions STRONG BUY - > 20% total return over the next 3 months, with identifiable share price catalysts within this time frame BUY - > 15% total return over the next 12 months for small caps, >10% for large caps HOLD - -10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps FULLY VALUED - negative total return > -10% over the next 12 months SELL - negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame Commonly used abbreviations Adex = advertising expenditure EPS = earnings per share PBT = profit before tax bn = billion EV = enterprise value P/B = price / book ratio BV = book value FCF = free cash flow P/E = price / earnings ratio CF = cash flow FV = fair value PEG = P/E ratio to growth ratio CAGR = compounded annual growth rate FY = financial year q-o-q = quarter-on-quarter Capex = capital expenditure m = million RM = Ringgit CY = calendar year M-o-m = month-on-month ROA = return on assets Div yld = dividend yield NAV = net assets value ROE = return on equity DCF = discounted cash flow NM = not meaningful TP = target price DDM = dividend discount model NTA = net tangible assets trn = trillion DPS = dividend per share NR = not rated WACC = weighted average cost of capital EBIT = earnings before interest & tax p.a. = per annum y-o-y = year-on-year EBITDA = EBIT before depreciation and amortisation PAT = profit after tax YTD = year-to-date Page 9

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