MISC Berhad (MISC) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to MISC First Quarter FY 2021 Analyst Briefing Conference Call. Rozanah Hamzah for 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 first quarter financial year 2021 analyst briefing. We have with us today Mr. Raja Azlan Shah Raja Azwa, Vice President of Finance; Cik Eslin Halimi, Head of Financial Reporting, Governance and Budget Finance; Mr. Emran Othman, Vice President of Corporate Planning; Mr. Vincent Ng, General Manager, Corporate Planning; and Cik Suhaimi Saad, General Manager, 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 environment 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 first quarter financial year 2021 financial performance. Cik Eslin, over to you.

Thank you, Rozanah. Good evening, everyone. Thank you to the participants for joining MISC Berhad's Quarter 1 FY 2021 Analyst Briefing. Let me bring your attention to Page 3 of our AB pack. Lower revenue for the quarter, mainly coming from Heavy Engineering segment as a result of lower revenue from ongoing projects as well as lower number of vessels secured for repair and maintenance. However, this lower revenue was offset by the higher revenue from Offshore segment due to the recognition of the construction revenue for FPSO units as well as higher revenue contributed by the Petroleum segment, mainly due to higher TCE rates as well as higher earning days. Lower profit before tax from operations during the quarter mainly due to the lower revenue from Offshore segment as a result of higher share of profit that we recognize from a JV contract extension in the preceding quarter. Lower revenue also contributed from the Heavy Engineering segment due to the additional cost provision provided from an ongoing project. This lower revenue, however, offset from the recognition of higher profit deposits from Petroleum segment as a result of higher margins mentioned above. For the nonrecurring items during the quarter, there were an impairment of noncurrent asset as compared to the preceding quarter, there were also an impairment of noncurrent assets and write-back of trade receivables. On Page 4 of our AB pack, higher revenue mainly coming from the contribution from Offshore segment as a result of recognition of construction revenue for the FPSO unit. This positive contribution offset by the lower revenue from Petroleum segment, mainly due to lower blended TCE rates. While lower profit deposits from operation during the quarter, mainly due to the lower profit before tax from operations from Petroleum segment as a result of lower margin on freight rates and lower profit before tax from operations from Heavy Engineering segment as a result of additional cost provision recognized from ongoing projects in the current quarter. On Page 5 of our AB pack. Cash flow from operations continuously recorded a reasonable level comparing between preceding and corresponding quarters, mainly due to the collection from the main core business segments. However, I would like to bring to your attention that cash flow from operations as compared to corresponding quarter show a lower number, mainly due to the nonpayment as a result of ongoing legal case since April 2020 and also this lower of cash received offset by a one-off prepayment received from our customer. On Page 6 of our AB pack, our debt balances hovering around an average of about USD 3.3 billion since March 2020. This is mainly due to the quarterly repayment and drawdown for the recent project, which is in the pipeline. Now I move on to the financial performance by business segment. Let me start off with the LNG Shipping segment. Revenue and profit before tax for LNG Shipping segment were quite stable between the comparative quarters. This can be seen mainly due to the recent delivery of the VLEC vessels that lead to the high earnings base for the quarter. Moving on to the Petroleum & Product Shipping segment. Higher revenue in the current quarter as compared to the preceding quarter, mainly due to higher TCE rates for Aframax and higher earning days. We can see lower revenue recorded as compared to the corresponding quarter, mainly due to lower freight rates for midsized tankers and VLCCs. However, this was offset by higher revenue earned from the DP Shuttle Tankers since we received deliveries since quarter 1 2020. For the profit before tax for operations from Petroleum segment, we can see the movement was in line with the revenue movement, as explained earlier. On Page 9 for Offshore business segment, you can see higher revenue reported in the current quarter, mainly due to the recognition of construction profit of -- for FPSO unit, whereas for PBT, lower profit showed in the current quarter as compared to the preceding quarter mainly due to the recognition of share of profit from our JV due to the contract extension in previous -- in preceding quarters. And finally, for Marine & Heavy Engineering segment, we can see that lower revenue recorded in the current quarter, mainly due to lower revenue earned from the ongoing projects as well as lower number of vessels appeared for repair and maintenance in the Marine segment. In addition, loss in the current quarter, mainly due to the additional cost provision for an ongoing project that I mentioned earlier. That's all for today, I will now pass to Vincent for market environment and business updates. Thank you.

Thank you, Eslin. Good evening, everyone. Thanks for joining us. For the market environment, if you turn to Page 13. For the LNG Shipping segment, you can see that as we come to the end of the winter season that rates have retreated. This is a typical seasonal pattern after the very frigid winter that we had over the last quarter, right? The other events that also led to the lower charter rates or spot rates for LNG were the winter freeze in Texas that disrupted exports of LNG. And then also the easing of the congestion of Panama Canal, and this had driven up the vessel availability and contributing to the lower rate. The spot rates are expected to remain low in quarter 2. We don't think that it will go up significantly. But we can see that there's a little bit of uptrend on the 3-year time charter rate as some of the customers have started to lock in the low rates at the moment to take advantage of it. Moving on to the next page, Page 14, which shows the new buildings. As you can see, there is an increase in the new builds to be delivered in 2021, quite a significant increase in 2021 compared to last year. And then it subsequently falls to 29 in 2022, right? So however, we noted that the liquefaction capacity that's coming online in 2021 is lower approximately 10 million tonnes per annum. So because of this mismatch between the supply of ships as well as the demand, then we see that this will keep the rates in check for the current year. Going over to the Petroleum segment. As you recall, in the fourth quarter, it was a very weak quarter, which the normal peak charter rate season was absent. And so we see that trend still continuing into the first quarter. And this is because of the poor oil demand and also the production cuts by OPEC+ that have continued. The VLCC rates have continued to weaken, although we think it may have bottomed up in April. For the Suezmax and Aframax rates, there have been some potential -- some marginal improvement, and they was -- further boosted towards the end of March by the blockage at the Swiss Canal, which boosted charter rates for midsized tankers. However, that was short lived. In the short term, the next few months, we think that the tanker market will remain difficult. Although one positive factor is the gradual return of OPEC+ production to the market. They have announced that they will gradually increase the production from May to July by -- in total of 2 billion -- 2 million barrels -- from 2 million barrels per day. And so this gives some grounds for optimism for the second half of the year. So hopefully, with the higher level of vaccinations in the U.S. and Europe, this will allow some normal resumption of economic activity and traveling and that will help lift charter rates for petroleum vessels. In the following slide, on Page 16, again, this one looks at the tanker supply side, you can see that deliveries in 2021, '22 will be slightly higher than it was in 2020. However, the growth will still be considered moderate. And also in terms of scrapping, however, that has not really picked up pace. So we see that this picture has not changed very much since the last quarter. For the Offshore segment, on Page 17, again, I think not very much new in this picture. The Offshore and Exploration & Production CapEx, E&P CapEx is expected to experience some mild rebound in 2021 and then to be followed by a more robust recovery in the following year. We see that the FPS awards, or Floating Production System awards, have resumed in quarter 1. After quarter 4, there were no awards during that quarter. So I think we see that there is still a potential for further awards, especially in the second half of this year in South America. So that's it for the market environment. I will now move over to the business update. For the LNG business, there were a number of deliveries during the quarter. If you recall, we took delivery of 2 vessels last year. So we have taken the delivery of the remainder vessels out of the 6 steps for the VLECs, of which one was in quarter 2, which is April. So up to now, we have taken delivery of all the 6 VLECs that we had purchased from Zhejiang Satellite, and they are now on time charter for 15 years. In the meantime, the segment will continue to explore opportunities, both in the conventional and the nonconventional LNG space. On Slide 20, for Petroleum & Product Shipping, the current portfolio mix is at 67:33 term to spot. This is slightly higher than it was the last quarter, which was 65:35. During the quarter, we announced the charter with Shell for 2 -- or for 3 LNG dual-fuel VLCCs to be delivered in 2023. And also during the quarter, we redelivered 2 VLCCs that were later chartered in, and we sold 1 Aframax. Earlier last quarter, you recall, during the last call, we announced also the delivery of Eagle Pilar, which is the DPST, which was also delivered in the first quarter, but we didn't include in this slide because we have already included in last quarter. For Offshore business, we sold MOPU SATU and MOPU DUA in the quarter. And the focus for the Offshore segment this year is pretty much to focus on the execution of our Brazil FPSO, and we will continue to be selective for other opportunities. In terms of the GKL legal case, I won't read into detail, but just to bring to your attention that latest developments during the quarter that we had some hearings that are scheduled for August and September. So that's the latest on GKL. In terms of the other case, PCPP and MOMPL on Page 22 to 24. Again, I will not read it all to you, but there are some development, but not -- still not resolved yet, so it's still ongoing. For Marine & Heavy Engineering, on Page 25, just wanted to update that I think you're aware that for the Offshore segment that MMHE was awarded the Jerun contract in Sarawak, the EPCIC contract. And during the quarter, they also completed the repair and maintenance of 29 vessels and secured 36 new jobs. The order book backlog at March 31 is approximately MYR 3 billion, which compares against MYR 1.9 billion in the previous quarter. As for the tenders ongoing Heavy Engineering tenders that worth about MYR 7 billion to MYR 8 billion tenders submitted as of March. In terms of the other marketing activities, we continue to look for opportunities in the traditional Marine & Heavy Engineering businesses as well as newer areas such as modular fabrication and offshore wind farms. So with that, I conclude my presentation, and I pass you back to Rozanah.

Thank you, Cik Eslin and Mr. 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] First question, we have Ho Meng Kong from UOB.

Congrats on your results. I have a number of questions here. So as what operator say, I will go through one by one. First is, on the Petroleum. I think previously you guided that Petroleum will be a loss. So -- and I think by now you are expecting the shuttle tankers, right? So in this extent, your profit from Petroleum business by the new well in a sense. So may I know what were the reasons that helped to contribute the better-than-expected result? Was it because of lightering side or -- and also on this question, may I also know your spot rate exposure by your VLCC, Suezmax and Aframax? Yes.

Maybe I'll take the last part first, before I hand over to the finance team to explain that.

Sure. No problem.

Yes. Just on the -- you wanted to understand the terms of spot mix for the various classes, right?

Yes.

So far VLCC is 89:11 on the spot. For Suezmax is 74:26 and for Aframax is 54:46. So just as a comparison, easy comparison in Suezmax and Aframax, the term ratio has gone up, while for VLCC has gone down a little bit. So now maybe the finance team want to take on the first part.

Okay. Ho Meng, thank you for your question. This is Azlan here. I think last time we spoke, the rates that we were looking at were very low. We were looking at the rate, December, particularly for the Offshore sector, but there was some bounce back in those rates in the first quarter. So we did not perform as badly as we thought that we would have performed.

Do you roughly know the bounce back from which region is it like in the lightering side? Because if you remember last time, I did ask you whether you guys may benefit from the U.S. sector incidence. Yes.

The Aframax has -- the lightering business was particularly low because of the volume issues -- because of the refinery run were not as strong as the previous quarter. And so we were seriously affected by demand. And the Afra sector is -- was particularly hit during this quarter.

Okay. And can I just double check in terms of your fleet profile for the Petroleum, right? Okay, you said you redelivered the Eagle Vermont and Eagle Virginia. When I look at your fleet profile, your -- versus what you were sourcing in the previous quarter, your interest of VLCCs used to be 2 and now it has become 0. So I believe it's related to the 2 VLCCs. So in this sense, is it container disposal or how should I see it? And also on the other one, the -- I noticed that your LR2 number has increased from 2 to 5, I think, is that because you shifted some of the Aframax to LR2? Or what was the container number related to? Yes.

Sorry, Ho Meng, can you repeat your question, please?

Sure. The -- in your fleet profile, right, in slide in your fleet profile information, you used to have 2 charters in VLCCs. Now it becomes 0. So is that related to the redeliveries of the Eagle Vermont and Eagle Virginia? So is it considered disposals? And my next question is on LR2. I think there used to be like 2 or 3, I think, in the last quarter, and now it becomes 5. So yes.

Yes, I'll take on that one. In terms of the VLCC, yes, the chartering was the ones after Eagle Vermont and Eagle Virginia are the 2 that you mentioned, which is the ones that are redelivered. So to confirm that, that is correct.

So in a sense you took off from the fleet profile. So when you say redelivered, does it mean it is disposed?

Reduced. Yes, it's reduced by 2.

Oh I see. So it's the same as a disposal. Is it?

We don't use the word disposal because we don't own that vessel. We charter in on a bareboat basis. And then we charter out. So that's why we fully under did it. So what happened is that we fully under chartered-in to mean that we don't own the vessel, but we charter in on a bareboat basis or it could be on a time charter on bareboat. So that column doesn't differentiate. But we charter in because, basically, we don't own it. But after that, we operate the vessel and we make the difference. So in the quarter, we so-called redelivered means returned back to the owner 2 vessels.

I see, okay. All right. So on the LR2...

I think the LR2 one -- I think -- I don't have a specific answer to your question. I mean they will look at the requirements of vessels at each point. So if they need more, then they will -- and they find it is worthwhile, they would charter in more.

Because I -- we've been looking at your previous quarter, you used to have 5 Aframax. Now it becomes 2 for Aframax and then LR2 there's a 3. So -- and I know Aframax can be -- LR2 depending on the type of work. So I'm just wondering whether is it kind of like you shipped some of the Aframax for the LR2 in the meantime? Yes.

Not that I'm aware of. But I'll -- we'll come back to you on that.

Okay, sure. Then I'll go to the next question quickly. May I know what is the gain for the Mero 3? And also, I think you briefly mentioned in your presentation, there was a one-off payment received from a client, if I saw correctly. So what was the amount?

Yes, the gain from Mero-3 is roughly 50% of the operating profit from the Offshore business.

50% of the $64 million, okay.

Yes. Roughly there about. Your next question, what was that, again, Ho Meng?

I think in your presentation just now, I think you mentioned -- if I heard correctly, you mentioned there was a one-off payment received from a client, not sure if I did hear it correctly, what is that and what's the amount?

I think this was a contract extension relating to one of our assets in Vietnam, where we recognized a gain upon a contract extension.

Is it in this quarter? Or are you referring to in the past quarters?

In this quarter, right, Eslin?

If I'm hearing your question correctly, Ho Meng, are you asking about the cash flow from operation, right?

Yes. Yes, correct.

Azlan, he's talking about the increase in cash flow from operations in quarter 1 2020, the one-off that we received from outline prepayments.

I see. Okay. Okay. Okay. That was basically prepayment that we received in the first quarter of last year from one of the clients under the Petroleum unit. So that was just a one-off item.

One-off items incurred in this first quarter of '21, can I...

No, no. It was --

2020.

The one-off prepayment received in Q1 of 2020.

Oh I see. I see. Okay. Okay. Okay. My next question, may I know what is the VLEC contribution in the first quarter of '21. I assume that this represents 5 vessels booking, right? Yes.

It's still negligible because not all of them were delivered from the beginning of the first quarter, I think by the end of the first quarter, there was about 3, then in April, we'll receive a few more. So their contribution was minimal.

Okay. That's interesting. So what was the reason for the quarter-on-quarter increase in LNG because last quarter, it was 50, and now it's 66. So is it mainly maybe small amount from the VLEC and the other, is it because spot rates or high earning days, less dry docking?

In a way, high earning day, yes.

Okay. Less dry docking in the sense?

Yes, yes.

Okay. Okay. My last question is on the -- I think TriNet recently reported that you may be looking to dispose CPU. And they say that CPU apparently remains in better condition since it was, at least for the past few years. Can you confirm that? And also, is the impairment in energy-related to that vessel?

Sorry, can you repeat the question, Ho Meng?

Okay. TriNet, you know the shipping new. They have recently answered that you may dispose away the CPU, you are looking at options to dispose CPU. And they say that CPUs remains idle until today. So can you confirm that? And also, is the impairment in the LNG, I think, is that related to CPU?

I think because we are going through a sale process now, we would rather not comment on this question now, Ho Meng. We are in the midst of the process. So if you try to understand, we wouldn't want to reply on the question now.

I see as -- and whether you're idle or not -- okay, maybe I rephrase the question what are -- sorry about that.

Thank you. Thank you.

Next question is Mr. Raymond Yap from CIMB Investment Bank.

Okay. So can you tell me what the Offshore construction revenue, how much of it was recognized in the first quarter, please?

In the first quarter...

Just now you mentioned that profit was about $30 million plus, right? So I just wanted to find out what the revenue was, construction revenue?

Yes, it was less than $30 million, Raymond.

Less than what?

it was less -- no, no, the profit was less than $30 million. And the -- maybe about $130 million.

1-3-0?

Yes. The revenue was around 1-3-0.

U.S. dollars, okay. In terms of the LNG going to your year-on-year comparison, first quarter last year, first quarter this year, the revenues were about the same, and the operating profit actually grown even with the VLEC. What was the reason for the drop in the operating profit?

There was a bit more of repair costs and dry docking that we had to incur in the LNG sector.

Okay. Sure. Okay. So moving on to the tanker sector. During the first quarter, you sold the Eagle Tampa, which was the Aframax. And in your cash flow statement, there was a MYR 55.7 million disposal proceeds. May I know how much of that MYR 55.7 million came from the Eagle Tampa?

Can you give us a minute there?

Yes. Sure.

Can you help to answer Raymond's question, team please?

Okay. I'll move on to the next one, while I wait for that answer.

Sorry, if I may, on your question on the specific price, I don't think we are able to share with you the price that we are getting for this Eagle Tampa.

Okay. Okay. So could you give me some indication whether that would be the majority of the MYR 55.7 million?

I would say yes, mainly.

Okay. And the book...

Majority.

Majority. All right. Okay. So the VLCC on plan. There were some media reports that you had negotiated for that to be sold as well. Could I confirm whether that's true.

I don't think we can comment on that, Raymond.

Okay. Okay. Finally, on the Heavy Engineering, you mentioned there was a cost provision for an ongoing project. May I know which project does that relate to?