MISC Berhad (MISC) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to MISC's Second Quarter FY 2021 Analyst Briefing Conference Call. Navina from MISC Investor Relations team will run through the agenda for today's briefing. Navina, over to you.

Thank you, Diana. A very good evening, ladies and gentlemen. Thank you for participating in our second quarter financial year 2021 analyst briefing. We have with us today Encik Raja Azlan Shah Raja Azwa, Vice President, Finance; Cik Eslin Halimi, Head of Financial Reporting, Governance and Budget; Ms. Serena Wee, Executive Assistant, PG CEO Office; Mr. Vincent Ng, General Manager, Corporate Planning; Encik Suhaimi Saad, General Manager, Corporate Planning. 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. 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. With that, I pass the session to Cik Eslin for our first agenda, the update on MISC's second quarter financial year 2021 financial performance.

Good evening. Thank you, Navina. Thank you to the participants for joining MISC Berhad quarter 2 financial year 2021 analyst briefing. I would like to bring your attention to Page 3 of our AB pack, lower revenue for the quarter, mainly due to lower revenue from Offshore segment as a result of lower recognition of construction revenue for an FSO unit. Lower revenue also contributed from the Heavy Engineering segment as a result from the lower revenue from the ongoing project. Lower revenue from Petroleum segment mainly due to lower TCE rates as well as lower earning days. Higher PBT on operations during the quarter, mainly due to the higher PBT from Petroleum segment as a result of one-off compensation for a contract negotiation. Higher PBT from Heavy Engineering segment due to cost provision recognized from an ongoing project in the preceding quarter. This positive contribution offset by the lower PBT from Offshore segment due to lower construction gains coupled with repair and maintenance cost of net debt. As compared to this quarter and preceding quarters debts in nonrecurring items in both quarters, mainly due to the loss on deconsolidation of a subsidiary in current quarter and we have impairment of noncurrent assets as well as disposal of noncurrent assets in both quarters. Moving on to Page 4 of our AB pack. Higher revenue coming from Offshore segment due to recognition of construction revenue for a FSO unit. Higher revenue from Heavy Engineering segment due to increased in yard activity as prior period was impacted by the yard shutdowns during the MCO 1.0. Higher revenue also contributed from the LNG segment due to the lease commencement of the 6 VLEC vessels. This positive contribution for the revenue, offset by lower revenue from Petroleum segment mainly due to lower blended TCE rates and lower earning days. Higher PBT from operations during the quarter mainly due to higher PBT from operations from Heavy Engineering segment due to provision for costs associated with COVID-19 that we provided for in the corresponding quarter. PBT from Offshore segment also contributed to this positive numbers due to the construction gain recognized in the current quarter. On Page 5 of our AB pack. Kindly note, in this slide, we have presented the adjusted cash flow from operations as compared to the Bursa announcement. In this adjusted cash flow from operation, we have reflected the following. The first one that we consider all lease or charter investors and other assets as part of the operating activity. But for financial reporting purposes, payment of lease liabilities are classified in the cash flow from financing activities. Secondly, MRT considered the payment for construction conversion activities at capital expenditure payments. And internally classified them as an outflow from investing activities in measuring our performance and allocation of resources. However, for financial reporting purposes, this payment relating to construction or conversion of activities for offshore segment in key projects are required to be classified in the cash flow from operating activities. You may refer to the next slide for the detailed reconciliation. Overall, cash flow from operations continuously recorded a reasonable level comparing between preceding and corresponding quarters, mainly supported with its steady cash flow generated from offshore as well as LNG segments portfolio long-term contracts. On Page 7 of the slide, our debt balances shows an increase, mainly coming from the drawdown for the project which is in the pipeline. Now we're moving to the financial performance by business segment. On Page 9, increase in revenue for LNG segment since previous corresponding quarter, actually following the commencement of charter hire for the 6 VLECs. From the profit before tax perspective, profit before tax this quarter as compared to preceding quarter was lower mainly due to the impairment of receivables that we did in the current quarter. On Page 10, for Petroleum and Product Shipping segment, lower revenue recorded at comparing preceding and corresponding quarter, mainly due to lower TCE rates for midsized tankers and VLCC as well as lower earning days. Higher PBT record debt for this current quarter as compared to preceding quarter, mainly due to one-off composition for a contract negotiation. On Page 11, for Offshore business segment, higher revenue recorded in the current and preceding quarter mainly coming from recognition of construction revenue for a FSO unit. However, we can see lower PBT in the current quarter as compared to preceding quarter, mainly coming from lower construction fee recognized coupled with impaired maintenance cost of an asset. And finally, in the last segment on Page 12, higher revenue recorded in second quarter as well as previous quarter compared to the previous corresponding quarter, mainly coming from higher revenue from ongoing project as well as higher revenue from the Marine segment. Revenues recorded a lower loss before tax as compared to proceeding and corresponding quarter mainly due to cost provision recognized in the preceding quarter as well as impairment, the revenue impairment recognized recorded in the previous corresponding quarter. I will now pass to Vincent for market environment and business updates. Thank you.

Thank you, Eslin, and good evening to all the participants. Thanks for joining this call. I will take you through first on the market outlook, and starting with the LNG Shipping segment. As you all know, the typical second quarter of the year is typically a low season. However, this year, we saw a substantial strength in the spot rates for a number of reasons. China's LNG is still strong. There was increase in demand from Brazil because they had a drop, and the LNG was to make up for the loss of power from the hydro bank. They also -- there was also a recovery in liquefaction utilization rates compared to the preceding quarter. So you will see that the rate for second quarter '21 is actually the highest since 2014 for the same period in the year. At the same time, we also see a little bit of pickup in the time charter rates. The number of charterers appear to be trying to book some vessels for the winter season early so that to reserve the slots before the rates go up even further. Overall, we think the shipping rate for LNG will be well supported going into the following quarter. Going into the next slide, which you will see is on the deliveries from LNG carriers. We see that the number of orders for 2021 is expected to be about the same as it was last year, which is about 55, so give or take 1 or 2. And we see that because there will be demand coming up from new projects that are expected to come online over the next few years. At the same time, we noted that there is a tightness in the shipbuilding berths due to some reservations by Qatar for its program. They have made some reservations for quite a number of slots. At the same time, there has been increase in steel prices over the last few months, and this has led to an increase in newbuilding cost. So some of the charters may want to lock in the vessel orders before the prices go up even further. Going over to the Petroleum segment, not much good news for the quarter. In terms of rate, pretty low, in some cases, even lower than the first quarter. Again, the story is due to oversupply. The global oil demand is improving but not that fast. At the same time, the OPEC+ production cuts are still having an impact on the market. We expect the market to remain difficult in the short term. However, there will be some optimism in the medium term as OPEC+ has recently agreed to increase its production by [ 400,000 ] barrels a day from August onwards and all the way to 2022. And at the same time, of course, we know that as vaccination rates are improving around the world, especially in the West. Looking at the -- on the next page, we see that the fleet growth is also quite moderate, rather low. We don't expect a huge number of orders to come in for the coming quarter -- current year due to as what we said, the limited shipyard slots and also higher new prices that I mentioned earlier. Demolition activity has been still quite slow, but you can see from the chart that it has actually picked up in the first half of 2021. And you can see that the first half 2021, demolition actually is higher than the whole of last year. So there is some optimism that there will be continued pickup. And therefore, reduce the oversupply situation in the market. Moving on to the Offshore segment. Offshore segment has been pretty stable. The high oil prices is a good sign. It works well for CapEx by all majors for them to support additional projects, on projects in the offshore and upstream sector. So we see that there is expected growth in this segment. And we expect more FSO awards over the next year and then coming years. This -- a lot of this will come out of Brazil and Africa. Now moving on to business updates, starting with the LNG business. Just to take everyone that we have taken delivery of the last VLEC out of the 6 that we ordered that we purchased from Zhejiang Satellite, so they are all now come into service. We have also taken delivery of the first of the 2 joint venture newbuild LNG carriers with NYK and Mitsubishi Corp., it's called Diamond Gas Crystal in the second quarter, which is in May. And after the quarter, we took delivery of the second vessel, which is Diamond Gas Victoria. So currently, we have taken delivery of both the vessels that we have entered into this agreement with NYK and Mitsubishi Corp. And this will be employed on the time charter for 18 years. During the quarter, we also concluded the sale of Puteri Firus, one of our old LNG carrier. And overall, the segment will continue to explore opportunities on a selective basis to support the growth of the LNG business. Going over to Petroleum and Product Shipping. The current portfolio mix is 72:28 term to spot, which is higher than the previous quarter, which was at 67:33. During the quarter, AET, our Petroleum segment, sold 2 Aframaxes and 1 VLCC. And we delivered 2 Aframaxes that we have been chartered. So there will be a total of 5 vessels. Moving on to the Offshore business. The current activities in the quarter are mainly on the focus on the execution of Mero-3 project. No new so-called award for this quarter. In terms of the litigation for GKL, things are still proceeding in the court. And similarly, for the PCPP and MOMPL, they are also proceeding in the court. So I will not go through in detail, which you can find all the details in the process of the litigation. Finally, I go over to Marine and Heavy Engineering. And during the quarter, the Marine division has completed the repair and maintenance on 50 vessels compared -- as of third quarter, cumulatively for the first half. The order book backlog at June is MYR 2.7 billion. This compares slightly lower compared to the previous quarter of MYR 3 billion. And the tender book is approximately MYR 8 billion to MYR 9 billion, which is slightly higher than what was in the preceding quarter. So I think that's it for the update from my end. I would like to pass it back to Navina.

Thank you. Thank you to 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. Ms. Diana, over to you.

[Operator Instructions] Mr. Raymond Yap from CGS-CIMB.

So okay, I just want to ask a couple of financial questions first. In terms of the other income on the Bursa announcement at MYR 207.6 million, that must be in relation to the one-off compensation for the contract renegotiation for the Petroleum division. Am I correct? If that's correct, can you explain what this one-off compensation relates to?

Thank you, Raymond. Thank you for the question. Azlan here. That is strategically one-off compensation relating to our lightering business, where it's basically to remove the fluctuation under the lightering contracts. So we were...

So basically, it's to compensating for the fluctuation in the rate, is it, so that your time charter equivalent rates do not actually fall by as much as the spot rate imply?

Yes, part of it is the rate. The other one is the volume. So there is a compensating adjustment that we are entitled to if -- due to volume variability. So this was to sort of give more certainty to our clients.

Okay. So -- but if this is -- I understand the lightering business has performed on the basis of a contract -- a contract of affreightment, if I understand correctly. So it wasn't -- could I say that the reason why this materialized was because the terms were not properly set out in the COA, which is why you had to renegotiate it? Or what's the genesis of this?

Yes. Do you want to share the detail with Raymond, [indiscernible]. Basically, Raymond, the compensation is to fix available in the charter costs for 3 years so that the net charter payment are not subject to market fluctuation. And the net charter payments are dependent on the lightering activities in the U.S. Gulf. And the client has decided to make this one-off payment to fix the net charter payment. So the one-off...

Okay. Charter...

Yes. Correct. Correct.

Okay. So does this have an implication for future performance of the Petroleum tanker division? Will it be doing better going forward due to this inclusion of this contractual terms? Or is this just completely one-off and relate to the past solely?

There might be some minor effect over the next 3 years to the Petroleum sector.

Okay. All right. So anyway, I'll move on to the next one, which is the impairment on assets in the Bursa announcement was set at MYR 42 million. And on Slide 8, where you have a negative $7.7 million nonrecurring item in the LNG division. Is that negative $7.7 million related to the impairment on assets? And is that related to the sale of the Puteri Firus which you had to make an impairment on?

Yes. If I'm not mistaken, the Puteri Firus, we already took the hit the last quarter. So these are other vessels.

Okay. What other vessels are leased that you need to provide?

There's -- I mean a few vessels -- I mean, there are about 4 or 5 vessels from various classes from putting that to class to 3A and 3B.

Okay. Why is there a need to provide the vessel? I mean the contracts are going on.

I mean we do our impairment segment every quarter. So given that some of these vessels are approaching expiry, based on the VIU calculations, there might be some changes to the numbers. So the impairments that were charged by vessel were not very big. We're talking about $2 million to $3 million per vessel. So it's not a big charge.

Okay. Sure. Okay. And then in addition to this USD 7.7 million impairment on the LNG asset, you also have another impairment on receivables which amounted to MYR 44 million. Why do you have to impair your LNG receivables?

Okay. This one is again related to our YLNG contract, there was a further extension to 2024. So based on the time value of money, we need to make -- we need to revise the calculation, and this resulted in this about USD 8 million to USD 9 million of additional impairment.

Okay, okay. So Yemen LNG owes you money and the repayment date has been pushed to 2024. So this impairment on receivables is to account for the time value of money.

That's right. That's right.

I see, okay. All right. And if I look into your slide on the cash flow, where you adjust your cash flow to factor in the Mero-3 CapEx. You mentioned that the slide -- on Slide 6, it mentions that as at 30th of June, the year-to-date payment was USD 131.9 million. What does that mean? Does that mean -- that is the payment on the CapEx? But...

That is the investment in the development cost of Mero-3 during the period. So the auditors have advised us that after looking at other companies like SBM and so on, that the proper accounting treatment is to capture -- because we are recording construction revenue and construction profit and all that, we have been advised that we need to take this CapEx outflow as an operating cash flow item. However, that is actually -- distorts our CFO figure, so we have made an adjustment. And likewise, if you look into SBM as well, management also talks about directional reporting and all that, where they do make similar adjustments as well.

Sure. Sure. I understand. Okay. So this is the cash outflow. So what I'm interested in is the absolute amount that's been accrued into your Mero-3 fixed asset. And I'm looking at the Bursa announcement, it says that the construction work in progress amounted to about MYR 2.2 billion, which works out to be about USD 500-plus million. Can I take that as being entirely related to the FPSO Mero-3, about USD 500-plus million, not necessarily the amount that you have actually paid, but the amount that has been accrued in terms of your progress.

Where is that -- Raymond, I don't see that figure.

There is a -- it's not in your slide. It is in your Bursa announcement. That would be on note A10, A-1-0, which is on Page 10.

Okay. So where is the figure you're talking about? I don't see that figure?

It's on Page 10. It says on Note A10, it says that included in ships are construction work in progress of MYR 2,172.8 million. Is that...

Those would be others because the Mero balance is not captured under PPE. It's actually captured in the noncurrent asset.

Noncurrent assets, yes, I'm trying to identify where there might be -- which line is it on the balance sheet?

Other noncurrent financial assets, 1.8 B.

Okay. So that is the Mero, I see. Okay. Okay, sure. I got it. That was one of my questions as well. Okay, I got it. Okay. Great. Okay. In terms of the KPOC dispute. There's a $28 million in damages that you've been -- MMHE has been asked to pay. Has it been provided for? Or will it be provided for in the future quarters?

Sorry, Raymond, just to come back, right? The amount that you see on the asset side of the balance sheet, this is the construction revenue, yes.

Yes. Yes. It includes the profit, yes, I understand. It includes the construction profit, yes. Okay.

Sorry, can you repeat your question on KPOC, please?

Yes, the $28 million that MMHE has been asked to pay KPOC, has it been provided in the financial statements? Or will it be provided in the third quarter?

At the moment, we feel that we have got good grounds to argue the case out. We believe that there have been certain breach of natural justice and also breach of jurisdiction in this case. So we have not actually provided for that $28 million.

Okay, sure. May I know what the construction revenue and profit, how much of that was booked in the second quarter for Mero-3 in terms of the volume of revenue from...

The profit was somewhere between $20 million to $25 million in the second quarter.

Okay. How about revenue?

Revenue will probably be maybe 120 or so or 100.

100 to 120.

Yes.

Okay, sure. And in terms of the Diamond Gas vessel, one was delivered in the second quarter. I understand that this is an associate level, right? So that's -- am I right to say that it didn't contribute to revenues but it did contribute to profit?

Yes, it will be part of the JV line, share of profit from joint venture.

Okay. Great. And just 2 more questions. Are there any of the -- you have 12 FSO or FPSO assets currently? Do any of these 12 contracts expire? Or have they any expire recently? Or are any expiring in the next year or so?

There are a few that have recently been extended of which some of those were 1-year extension. There was...

Espirito Santo -- like Espirito Santo last quarter...

No. No. Espirito Santo has been extended right up to 2020, if I'm not mistaken.

Okay. Okay. How about specifically looking at the DULANG, is that still operational? Or has this been expired...

No. That has been extended for another 3 to 4 years.

I see. Okay. So it should expire in 2024, yes?

'24, '25, yes.

Okay. Can you give me the exact date, if possible? And the last question is...

Q1 '25. You can take Q1 '25.

Q1 '25. Okay. Okay. Last question is on your Bursa announcement, there's a couple of new companies called Magellan X, SOL-X, Chord X, Spares CNX. What are all these names? What -- how does this -- what is the relationship that you have with Boston Consulting Group?

Okay. These are start-up companies basically to actually provide services to vessels in the areas of Spares, in terms of repairs and one other area. And they are still in the startup phase. So they have yet to -- they have just begun to generate revenue but it is still not profitable. And Boston Consulting Group was -- joined us to take a small stake in these start-up companies.

Okay. Yes. So you hold the vast majority of the equity stake, and these companies are going to be servicing your own vessels? Is it an in-house thing? Or will it also extend services to third-party ship owners?

Yes. It needs to service the broader market. So they will start off with our vessels, and we would benefit to operational efficiency in terms of lowering down our SOC. But the big chunk of the business case is to serve the wider market.

Okay. And is BCG sort of just an investee or are they actually contributing operational knowledge into this venture?

Yes, they took 10% to 15% of each venture. And they certainly are contributing in terms of the innovation and also the expertise. They're also on the Board of the venture.

Our next question, Mr. Ben Lim from Macquarie Capital Securities.

Hi, can you hear me?

Yes. Loud and clear, mate.

Okay. I just want to go back to that one-off for your lightering. I just want to better understand what it means for your lightering revenue for the coming 3 years. It strikes me like you are potentially locking in rates in a way in the bottom of the cycle. So I want to understand how this benefits you. How many vessels are involved for this agreement?

The number of vessels -- can somebody help me here? Do we know how many vessels are there to go.

2 vessels.

Yes, 2 vessels.

Okay. And would we expect like the revenue to be locked for these vessels then for 3 years? Is it sort of fixed or...

No, the revenue will not be locked. But the cost will be minus an offsetting factor. We are removing an offsetting factor to the cost. So because we need to charter these vessels, where if there is a low volume, there will be some kind of adjustment that we would have been entitled to. So we took a position where we -- the client wanted to remove this adjustment over the next few years. So we agreed to this arrangement.

So it's actually -- you would otherwise have a more fixed contract. Now you are removing a term, so the client is basically bringing forward that compensation. Is that right?

Yes, yes, that's right.

That's much clearer. Okay. My other question is just on your LNG segment, I want to understand what the drydocking days were for this quarter, whether there was a big impact for this quarter? Because I believe you mentioned that you didn't move the numbers for the last quarter.

Yes. I mean this quarter, there was quite a significant amount of drydocking days I think in total, we had 100 to 250 drydocking days for LNG alone as compared to 90 in the previous quarter.

Okay. And would we expect this to drop off very sharply into the second half of the year? And would we then expect higher contributions from your LNG segment?

Yes, we should. In terms of the drydocking days for the second half of the year would roughly be maybe about, I would say maybe 60-40, 60% in the first half and 40% in the second half.

I see. Okay. So still -- yes, it's still quite high in the second half compared to the first half. Okay. That's all the questions from me.

And also in the VLEC assets, it came in on the second basis, right? So by the second -- by April, we had all 3 vessels in place. So during the second half, you're going to see the full contribution of all the 6, I think, carriers now.

Our next question, Mr. [ Kong Ho Min ] from UOB Kay Hian.

I have a few questions. Firstly, I just want to double confirm the asset number for the one-off compensation you talked about earlier, is it around MYR 208 million?