MISC Berhad (MISC) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to MISC Fourth Quarter FY 2020 Analyst Briefing Conference Call. Rozanah from MISC Investor Relations team will run through the agenda for today's briefing. Rozanah, over to you.

Thank you, Akadi. A very good evening, ladies and gentlemen. Thank you for participating in our fourth quarter financial year 2020 analyst briefing. My name is Rozanah Hamzah from MISC Investor Relations. And we have with us today Cik Raja Azlan Shah Raja Azwa, Vice President of Finance; Cik Eslin Halimi, Head of Financial Reporting, Governance and Budget, Finance; Cik Emran Othman, Vice President of Corporate Planning; Mr. Vincent Ng, General Manager of Corporate Planning; and Cik Suhaimi Saad, General Manager of Corporate Planning. We will now proceed with the presentation on financial highlights for the quarter's performance, which will be presented by Cik Eslin, followed by market outlook and business update by Mr. Vincent. At the end of the presentation, we will open the line for a Q&A session. Our event manager will later provide instructions on the Q&A process. Before we start with the presentation, I would like to bring to your attention to the disclaimer slide. During the presentation, we may make some forward-looking statements in reference to our plans and expectations, and actual results could differ due to unknown risks, uncertainties and other factors that are, in many cases, beyond MISC's control. With that, I pass the session to Cik Eslin for our first agenda, the update on MISC's fourth quarter financial year 2020 financial performance. Cik Eslin, over to you.

Good evening. Thank you, Rozanah. Thank you to the participants for joining MISC Berhad Quarter 4 2020 Analyst Briefing. I'll start off with the Page 3 of our AB pack. Higher revenue for the quarter, mainly due to the higher revenue from Offshore segment due to the recognition of construction revenue for an FPSO unit. Higher revenue also contributed by the Heavy Engineering segment due to the increased activities in ongoing projects as well as higher revenue during the quarter contributed by the LNG segment following the delivery of one VLGC unit. However, the above positive contribution was offsetted by the lower revenue from Petroleum segment, mainly due to lower TCE rates as well as lower earning days due to lower number of vessels in operation. Higher PBT from operations during the quarter due to the higher revenue from Offshore segment as a result of higher share of profit recognized during the quarter from a joint venture contract extension, coupled with the recognition of construction profit for our FPSO unit. The above, however, was offset by lower profit before tax from Petroleum segment due to lower margin on trade rates. For the nonrecurring items during the quarter, there were write-back of trade receivables in quarter 4 2020 as well as impairment of LNG vessel and offshore assets in the current quarter. As compared to the preceding quarter, there was an impairment of an offshore asset. On Page 4 of our AB pack, higher revenue and profit before tax from operations were contributed by the reasoning that I explained as per the Slide 3 earlier. Moving on to Page 5 of our AB pack. Cash flow from operations continuously recorded a reasonable level as compared between the preceding and corresponding quarter, mainly due to the collection from our main segment, which is LNG, Petroleum, Offshore and Heavy Engineering segments. However, as we compare our current quarter CFO as well as the preceding CFOs versus the corresponding quarter CFO, the reduction was actually due to the nonpayment as a result of the ongoing legal case. On Page 6 of our AB pack, our debt balances at this juncture, hovering around $3.2 billion since December 2019. This is mainly due to quarterly repayment and drawdown for the project during the quarter. Now we're moving on to financial performance by business segment. On Page 7, for LNG Shipping, revenue and profit before tax were quite stable between the comparative quarters. However, we can see higher revenue in the current quarter, mainly due to the higher earning days from the delivery of VLEC that I mentioned earlier. On Page 8, for Petroleum Shipping segment, lower revenue recorded as compared to preceding quarter, mainly due to lower TCE rate for mid-sized tankers and VLCCs as well as lower earning days. This is also the same reasoning for the corresponding quarters. However, we can see lower profit before tax in the current quarter as compared to the preceding and corresponding quarters, mainly due to the lower reasoning for the revenue, as mentioned above. On Page 9 for Offshore business. For the current quarter, higher revenue was reported, mainly due to the recognition of a construction profit from our FPSO unit. Whereas our PBT during the quarter, higher profit before tax reported, mainly due to the recognition of the share of profit from joint ventures due to the contract extension as well as the condition of the construction profit for an FPSO unit. And finally, in the last segment, on Page 10 of the AB pack, Heavy Engineering recorded the current -- higher revenue in the current quarter, mainly due to the higher revenue earned from the ongoing projects. However, as you can see, Heavy Engineering segment recorded a loss before tax in the current quarter due to the provision made for COVID-19 impact, which was affecting Heavy Engineering results this quarter accordingly. I will now pass to Vincent for market environment and business updates. Thank you.

Thank you, Eslin. If I may bring attention to slide -- Page #12. We'll start with LNG shipping. For LNG shipping, rates -- the rates for fourth quarter were very high. It was surging from third quarter to fourth quarter. This is due to a few reasons. There was a strong demand due to an extreme Asian winter. There were also some outages on LNG liquefaction facilities due to maintenance and outages as well as a shortage of available vessels, partly due to a congestion at the Panama Canal. So we see that in even -- this has extended into January, so we see January rates have also continued to rise. Going to the next page. When we look at the new building deliveries that have been contracted to the shipyard, we see that in 2021, there are going to be quite a large spike in delivery for the year, and this is expected to put some pressure on charter rates. This is also compounded by the fact that in 2021, it is expected that the liquefaction facilities that are supposed to come online this year will be substantially less than what it was in 2020. So there will be further pressure due to that as well. Having said that, I think most of our analysts will follow that most of our vessels are on long-term charters so they are not directly affected by this. Moving on to Petroleum. Petroleum, as mentioned by Eslin earlier, has been affected by low charter rates, and it's been quite poor in the fourth quarter due to the recovery in the oil demand has not been that quick as originally thought and as well as there has been supply restrained by the OPEC+ members to manage the oil prices. At the same time, there has been oversupply of vessels. A lot of the vessels that were originally on floating storage in the earlier part of the year have gradually been unwinding their position and coming back into the active market. So we see that this market is expected to remain challenging for large part of the coming year. But hopefully, we think that there could be some recovery towards the end, depending on how fast the economic recovery happens, including vaccination and so on. On Slide 15, looking at the supply of vessels from petroleum side. You can see that there were -- there's going to be a moderate level of newbuild deliveries in 2021, just slightly above what it was in 2020. There are some additional newbuilds that were ordered in the fourth quarter so there could be some anticipation of demand picking up in future years. On the demolition side, we can see that demolition in the last 2 years has been extremely low. Having said that, we think that there are sectors that will encourage more demolition in 2021 as a lot of the old vessels that were originally put out for floating storage are coming out of floating storage, and these old vessels are quite likely candidates for scrapping. Turning over to the Offshore segment. On Page 16, you can see that the 2020, there was a sharp drop in Offshore CapEx. And 2021 itself will be fairly subdued as well, not expected to do much. But then going up from '22 onwards, it will be rising. Having said that, we can see that for floating production systems, or FPS, there is still growth in there with -- you can see that is the dark -- represented by the dark blue bars. There is still expected to be growth in the FPS sector, and most of it will be in the Latin American segment. That wraps it up for the market development. I will now go to business update. On Page 18, business updates-wise on LNG side. We took delivery of our second VLEC, Seri Erlang, in the early part of the year. This will be the second of 6 VLECs that we are acquiring and -- on the charter to Zhejiang Satellite Petrochemical Co. Ltd. for 15years. We continue to explore opportunities for charters in this space as well. On the Petroleum & Chemical business, the portfolio mix remains at 65:35 in this quarter, which is the same as what it was in quarter 3. During the quarter, we took a delivery of a new DPST, Eagle Passos. And then after the quarter, we took delivery of Eagle Pilar. This is another DPST. One of them for Petrobras and the other one for Shell Brazil. During the quarter, we also sold one VLCC, which is Bunga Kasturi Tiga, and 2 Aframaxes. Going on to Page 19 on Offshore. During the quarter, we extended the charter for FPSO Espirito Santo by 5 years with Shell Brazil. And we also successfully delivered FSO Golden Star to offshore Vietnam. During the quarter, FSO Angsi was scrapped. The other update on offshore is on the legal update. On the case of the application for Gumusut Kakap, there is not a significant update on this one. The -- we are still pending expected hearing of the case in second quarter. So I won't go through in detail on the -- pages that we -- on the description that follows, which you can read for yourself. Similarly, on Page 21 onwards, for MOMPL case, there is also no development during the quarter. Finally, on Heavy Engineering on Page 23. Just to cover the year-to-date achievements of Heavy Engineering, we have completed the construction of the FSO Golden Star external turret, sail away of Bokor central processing platform, a sail away of Bergading Mercury Removal Unit and the completion and sail away of the Pluto Water Handling Module. Those are the key completions for Offshore. And for the Marine Repair side, completed repair and maintenance of 64 vessels and secured 61 jobs during the year, including the -- and the completion of a conversion work for FSO Golden Star. A notable accomplishment during the quarter was the completion and commencement of operations of MHB Dry Dock 3 in December, which will significantly expand its capacity in its Marine Repair business. The order book backlog is MYR 1.9 billion. And in terms of the engineering -- heavy engineering tenders submitted as at December is MYR 12 billion worth. So I think that covers it for my end. I will now pass it back to Rozanah.

Thank you, Eslin and Vincent, for the presentation on financial performance and business updates. With the completion of the presentation, I would now like to hand over the call to the event manager, who will guide and manage the Q&A session. Akadi, over to you.

[Operator Instructions] Our first question is from UOB, Ho Kong Meng.

Yes, I know I have a lot of questions. I sent some of the questions in my email earlier. But before I cover my other questions, can I just quickly ask, you mentioned in the offshore side, there is construction gains of the FPSO as well as the contract extension for Espirito Santo. May I know what is the amount for both of those items? Just quickly for those before I jump to my next question.

This is Azlan here. Okay. I mean for the Espirito Santo, we recorded, again, from the share of profit from joint venture about USD 50 million. And for the construction gain for the FPSO, the one that we're doing, it's about USD 20 million.

Okay. Espirito Santo is 5-0, USD 50 million?

That's our share because this is a joint venture.

Okay. Okay. All right. USD 50 million and Mero is -- how much in '20?

USD 22 million. USD 22 million to be precise.

USD 22 million. Okay. All right. Got it. Okay. Okay. So I jump to my -- the questions in the email. Based on -- okay, assuming -- based on your projections -- I'm sure you've done your projections, right? Just assuming if industry tanker rates do not recover for 2021 -- let's assume that -- this kind of worse-case scenario. But in view that you have new projects coming in, are you able to at least maintain your dividend payout? Or is there a risk that you may have to cut your dividend for -- at least for this year? That's my first question.

Yes, we hope to maintain the dividend, Kong Meng.

Okay. That means maintain the $0.33 or at least $0.30.

Thereabouts. Thereabouts. Because we believe that our recurring cash flow is still -- this year, we recorded about $1.25 billion of cash flow from operation. We hope that we will still be able to be at the level...

Hello? Hello? Your line broke up. I can't hear you. Hello?

Yes. This year, we -- for the past few years, we have recorded a cash flow from operation of about USD 1.25 billion, yes?

Yes. Yes.

Yes. So on that basis, we hope that we will still be able to maintain thereabouts. And because we feel that we are maintaining our cash flow from operation, we should maintain the dividend as well.

Okay, got it. Okay. And just to jump quickly earlier, the construction gain from Mero, right, that will be an ongoing item in the next few quarters, right? Would it be a growing number as you progress in your construction?

Yes. Yes. Yes. We hope to make good progress this year so you should see, I mean, a sizable portion of our profits coming from that this year. But again, these are accounting profits.

Got it. Okay. Okay. And jump quickly to the LNG, right, in the -- during the quarter for LNG, is the VLEC contribution sizable in the fourth quarter? Or is it quite small?

No. No. It's not very big because we just brought it on board. We should be able to see a more meaningful contribution this year as I think by first half of the year, we should be able to take delivery of all 6.

How much was it in the fourth quarter? And how much do you expect after all 6 are delivered?

Not much. I think in terms of profit, maybe $1 million or $2 million in the fourth quarter as well.

In US dollar, right?

Yes. Yes.

Okay. Okay. And just to continue on the LNG side, I understand you have a number of expiries of contracts within the next 4 years. Are you able to break down by year how many of those expiries sit in this year, next year and the year after?

Yes. I mean without going into detail, you're right, there's going to be some assets up for expiry. Yes, I don't want to go into the detail yet because we are still working on backup plans of how to get these things to be utilized.

Okay. But which year is the peak year of the expiries? Is it 2023, 2024?

Yes. If I'm not mistaken, we have one coming every year.

Okay. Okay. All right. And among the -- and moving forward for the upcoming first quarter results, should we expect a better earnings base for your LNG centers overall because of the high demand for spot trade? And also for your spot vessels, any of them have paid tariffs -- were able to capture the high rates that happened in the past [indiscernible]?

Can our team members help out here about the Balhaf and Balqis? What's the situation?

Yes, Azlan, I will chip in here. For the 4 spot vessels that we have, 2 of them are able to take advantage of some of the upside from the increase in rates. We have variable rates in the charter vessels.

When were they -- when were those 2 renewed? Was it the end of last year or early this year?

Well, some of them have been around for a while. Offhand, I think they have been extended for a few times. So I can't think of specific date, but they have -- we have had several extensions in Balhaf and Balqis during that period.

Mero extension -- you mean throughout fourth quarter?

The previous year. I think the previous year.

Okay. Okay. Okay.

The extensions are typically a few months at a go.

Yes. Yes, I understand. And the next one will be when? The next -- when is your next spot renewal period?

Of the 4 vessels, 2 of them have expiry in the first half of '21, and the other 2 have expiry in the first half of '22.

First half '22, okay. Okay. Okay. I'll move over to the crude tanker side. Okay. I want to cover the mix first. Okay. I understand that your spot mix in total is unchanged on a quarter-on-quarter basis. But if you go by build, between the 3, VLCC, Aframax, Suezmax, is it the same spot mix as well versus the third quarter mix?

Okay. I will -- let me go through the mix for -- one by one. For VLCC, in fourth quarter, it was -- term to spot is 94:6. For Suezmax, it's 68:32. And Aframax is 51:49.

Okay, got it. All right. Okay. And among your spot contracts right now, in view that bunker cost has been growing very high in tender in oil prices, are you like not -- do you have any protection at all? Or are you 100% exposed to the bunker cost trends for your spot centers? Or is there some sort of degree of protection from -- in your -- and how much is that?

I don't have an exact figure. But typically, our bunker, we do have some forward purchases of bunker. I don't have an exact figure, but it's -- we do forward purchase of bunker on a rolling basis. So that may so-called moderate some of the spikes in the oil prices over time. But otherwise, we are -- basically have to contend with the market because -- based on market charter rate.

Okay. And for the time charters, right, okay, the time charter is also going down as well. I think recently, some of -- one of your vessel was -- for the VLCC was renewed at $27,000. Okay. I know that your time charter risk -- your time charter contract has a pass-through mechanism and everything. But if we include the [indiscernible] finance cost, that $27,000, are you able to make profit on the VLCC level for the time charter? Is that a profitable rate after the [indiscernible] finance cost is [indiscernible].

Can I get help from the finance team on this question? Are you able to compute?

Okay. You're talking about the VLCC. Is that right, Kong?

Yes. Yes. I think one of the [indiscernible] report mentioned that your -- one your VLCC, Eagle Varna, has a 1 year contract, $27,000. So I just want to know at this rate, including the pass-through, but also if you assume on the property level after the [indiscernible] finance costs, are you able to make profit at this rate?

$27,000?

Yes, dollars.

Yes, I believe we can.

Okay. Okay. So it's still above your profit breakeven?

Yes, yes.

Okay. Okay. Okay. And for the Aframax, right, with the recent storm that hit the U.S. site, that shut down their plants over there, has that been -- I mean, it's still early days, but has that been more positive or more negative to your Aframax business in the U.S. side moving forward?

Sorry, Kong Meng, could you repeat that again?

With the reason weather that -- the harsh weather that hit the U.S. sites, their downstream plants and their production -- the crude production there. And I mean, you do have the Aframax -- your Aframax business in the U.S., right, that depends on import and export of crude. Has that been -- do you think that will be a net positive or net negative to your Aframax business there?

Okay. This is very recent so I don't have a specific update unless my colleagues can help me out. I don't have an update.

Maybe I will say, Kong Meng, it's going to be -- our first quarter for Petroleum is going to be a tough one. It's not going to be a rosy quarter for us.

Yes. Yes. Okay. Okay. And moving forward to -- just to quickly touch on Mero-3. Congratulations for the [ development ] of your yard and also -- and I think according to another report, the -- I think initially, you were expecting up to 30-plus module for FPSO. But right now, it's confirmed at 36 modules, something like that. So overall, my question for Mero-3, are you still looking at a $2 billion CapEx? Or based on the current estimate, it is now lower than $2 billion.

I think our CapEx projection, $2 billion was on the high side. We hope that we'll be able to make some savings on that $2 billion.

Okay. So $2 billion is [ max high ]. So depending on how you design, there's room to save on that?

Yes. Yes.

Okay. Okay. And my last question on the new thing that IMO, they want to introduce additional carbon reduction clauses, which may be effective in 2022 with -- on all ships. I don't know whether you have studied it. But if you know, can you comment on whether all your ships are already compliant to the new upcoming rule that IMO will implement? And if not -- if you do have some ships that are maybe noncompliant, how much -- or percentage of those ships you may need to dispose?

I don't have a specific update for you on that. We'll have to come back to you, okay? It's still...

Okay. It's a tough regulation. It's not implemented yet, but it is something -- yes.

Yes. It's still something being studied so I don't really have an answer for that.

Our next question is Alex Goh from AmBank Research.

I have got a few questions. Maybe I'll just run through one at a time. Regarding your construction gain from Mero, you've mentioned USD 22 million. Could you -- can I understand, what was your -- the profit margin on this? Basically, what was your revenue you recognized? And going forward, is this margin going to -- is it going up because depending -- following the S curve?

Yes, this is about around 20% margin, Alex.

I see. And going forward, how would be the shape of the trajectory going forward for this year?

In terms of progress, yes?

In terms of the profit margin. So should we be looking further towards a mid-20 level? Or should we still be on the same 20% level?

I think for this kind of project, we will land maybe in the high teens.

High teens, that may be lower than the 20% that you recorded in the fourth quarter. Is that right?

Yes, yes. Basically, I think if I'm not mistaken, based on the numbers that I saw, it will be high teens. But whatever it is, these are just accounting profit. We do not preoccupy ourselves with accounting profit. Just focused on the cash flow.

Okay, I understand that. And also your -- on a JV recognition on the 5-year extension for Espirito Santo, could you explain to us how -- why was this -- was there a one-off adjustment here? $50 million, how did it come about?

Okay. There's a few points here. Number one, we are extending the contract by 5 years, right, so there is some upside there. And number two, because of the extension of the contract, based on the accounting rules, we need to move from operating lease accounting to finance lease accounting. And this is where -- based on finance lease accounting, we normally will bring some upfront gain. And if you look at -- into the JV's account, as we move from operating lease accounting to finance lease accounting, we need to release a lot of the deferred income because when it was calculated -- when it was accounted for as an operating lease, the -- in order to straightline the profit loss account, there were some amounts which were booked in to the deferred income. So as we move to finance lease accounting, a huge deferred income needs to be released. And that's why there's this huge gain. At the JV level, it's a gain of more than USD 100 million. So our share is USD 50 million.

Okay. That's great. And also I got one question regarding your delivery of vessels. You mentioned there's going to be 6 VLEC delivery in the first half. But I'm looking at your schedule of future deliveries. You've indicated only 5 deliveries for the first half. Was there one delayed from last year?

No. One was -- we took delivery of one vessel last year.

Oh, I see. Okay. So for 2021, there will be 5 vessel delivery, am I right?

That's right.

Correct. That's correct.

Okay. And could you give us -- is it -- will it be in the second quarter or first quarter that you're going to see in -- for the 5 deliveries?

Most likely the first half. Emran here, by the way.

Okay. No, I'm sorry, is it going to be first quarter or second quarter, third quarter?

It's a mix of first quarter and second quarter.

I see, okay. And for the LNG carriers, there's going to be 2 deliveries in 2021. Could you give us exactly -- could you give us the amount or maybe the quarter of when it is going to be delivered?

I think we will stick to what's on the schedule there, which is first half and -- first half of the year and the second half of -- first half '21 and second half '21, one each.

Okay. Okay, great. Okay. That's -- okay. My last -- one final question. Given the fact on your -- the legal case for your MOPU, the 2 MOPUs, it seems that the court have awarded about -- around $15 million to you. Should we be expecting any type of write-back from that -- from the legal case?

Yes, Azlan here. We are going to try to take this to the end. So at this juncture, we are sticking to our guns here, Alex. We are not going to back down at the moment.

No. No. What I mean is that it seems like the court have awarded you up to -- first of all, there was $10 million, and the other one is about USD 5 million. So all together, it was about $15 million awarded to you. So would there be any accounting entries in terms of write-back?

MOPU. Sorry. Team, do you know what he's talking about? Team, I don't see this $15 million plus $5 million.

I'm not very sure which particular court case in regards to MOPU.

Yes.

Because as far as we are concerned, there is no any court case in regards to MOPU, unless I'm not aware of it.

Okay. No, because I'm looking at page -- on Page 21, on your Slide 21, you mentioned -- on the first and the second bullet point, you were awarded an entire claim of about USD 10 million, and the other one was about USD 5 million plus interest. So I'm just wondering, would there be any kind of gains that you could -- that you're going to recognize in the next quarter?

We're actually proceeding on our -- on a few other cases. So I think we don't have a legal advise as to comment on that at the moment. Can we come back to you on that?

Okay. Yes. Yes. No problem. That's all from me for now.

Next question is [indiscernible].

Just very quick 3 questions. First, on the LNG segment. It was mentioned that the fourth quarter EBIT was partly -- was lower partly due to higher vessel OpEx. Could you elaborate on this one?

Yes. This one is basically relating to a change in accounting treatment for our spare, where previously, we inventorized our spares. But because we are moving through the agency model and in order to be consistent with the ship owners and the ship management market, spares are actually expensed off. So we took the conscious decision to expense off the spares. So for LNG, it was -- in total, the company, it was about USD 12 million that we expensed off in the fourth quarter.

Okay. The next question, given the market dynamics of the anchor market now and your TCE to spot mix, do you expect the losses to continue from the fourth quarter for at least the first half of this year?

Yes. As I mentioned for the tanker market, in the near term, the prospects are quite uncertain. But with the vaccine rollout, we expect the refinery runs to improve and I think in the second of the half will be more promising.

And any color you can give in terms of how the first quarter has been so far for the Petroleum segment?

Yes. I mean we are expecting a loss now. I don't want to go into too much detail now, but the petroleum sector is likely to make a loss in the first quarter.