MISC - HOLD - 13 May 2008

MISC - FY08 results in line (Results Note)

Price: RM9.50

Target Price: RM10.10

Recommendation: HOLD


· FY08 results were within expectations. Core net profit of RM2.25b was almost spot on with our forecast but 6% below market consensus. Improved tanker rates and higher contribution from heavy engineering and offshore divisions were the key drivers for stronger group performance. Group also declared a 20 sen final dividend as expected, bringing full year dividend to 35 sen which translates into yield of 3.7%.

· QoQ, 4Q pre-tax profit (excluding exceptional) surged 47.2% on higher tanker rates and rising contribution from the heavy engineering and offshore divisions.

· YoY, FY08 revenue increased by 15.7% but pre-tax profit (excluding exceptional) was 2.6% lower, dampened by higher bunker cost which had escalated to US$516/MT by Mac 08 (+47.2% YoY) and softer tanker rates in FY08.

· Recent tanker rates surprisingly resilient. After retreating 54% from its peak of 2279 points in Dec 07, the Baltic Dirty Index (BDI) made a surprise bounce to 1818 points in May 2008 due to a spike in short term demand. The group's strong performance is therefore likely to continue in the next quarter.

· Heavy engineering and offshore divisions the next growth engines, as current tanker rates are unlikely to be sustainable with the sector still plagued by oversupply. Though the reverse-take-over of Ramunia is delayed slightly by 1 month, we expect the deal to be concluded as MMHE is in need of Ramunia's underutilised yard space. Offshore division will see the entrance of 2 FPSOs, namely Espirito Santo (49% stake) and Ruby (40% stake) late FY09 which will lift group PBT locked in long term contracts for both LNG and FPSO by another 1% to a total of 52%. In the medium term, growth could also be driven by the chemical division with 16 new deliveries slated for the next 2 years and the tank farm operation JV with Dialog.

· Maintain target price of RM10.10 based on FY09 PER of 15x but downgrade recommendation to HOLD given the recent strong share price performance. More details post briefing today.





KENANGA INVESTMENT BANK BERHAD (15678-H)