MISC Berhad (MISC) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to MISC's Third Quarter of 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, Dana. A very good evening, ladies and gentlemen. Thank you for participating in our third 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, Finance; Mr. Vincent Ng, General Manager, Corporate Planning; Ms. Serena Wee, General Manager, Corporate Planning. Before we start with the presentation, I would like to bring your attention to the disclaimer slide. During this presentation, we may make some forward-looking statements in our reference to our plans and expectations, whereby 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 third quarter financial year 2021 financial performance. Cik Eslin, over to you.

Good evening. Thank you, Navina. Thank you all to the participants for joining MISC Berhad's quarter 3 financial year 2021 analyst briefing. First, I would like to bring your attention to Page 3 of our AB pack. Higher revenue for the current quarter, mainly due to the higher revenue from Offshore segment due to the recognition of construction revenue for FPSO unit. Higher revenue also coming from KB Engineering segment, mainly coming from current ongoing projects as well as higher revenue also contributed from the LNG segment as a result of the higher earning days. However, the positive contribution for revenue this quarter was offset by the lower revenue from Petroleum segment, mainly due to the lower TCE rates as well as lower earning days. Lower profit before tax from operations during the quarter mainly due to the one-off compensation for a contract negotiation that we received for the Petroleum segment in the preceding quarter. For the nonrecurring items this quarter, we captured an impairment of noncurrent assets. In line with previous quarter also, we have an impairment of noncurrent assets. And in previous quarter, we have loss on deconsolidation of a subsidiary and disposal of noncurrent assets as the nonrecurring items. Moving on to Page 4 of our AB pack. Higher revenue coming from the revenue from Offshore segment due to the recognition of construction revenue for a FPSO unit. Higher revenue also coming from LNG segment due to the lease commencement of 6 VLECs. This positive contribution was affected by the lower revenue from Petroleum segment, mainly due to the lower TCE rates as well as lower earning days. And this higher profit from operations during the quarter in line with the revenue that I had explained earlier. Moving on to Slide 5 of our AB pack. Overall, our cash flow from operations continuously recorded a reasonable level comparing between preceding and corresponding quarter, mainly supported by the steady cash flow generated from the offshore business and LNG Asset Solutions segment portfolio of long-term contracts. On Page 7, our debt balances shows an increase mainly due to the drawdown that we had for the activities which is in the pipeline. Now we're moving on to financial performance by business segment. On Page 8, for LNG Shipping segment, revenue and profit before tax were quite stable between the comparative quarters, mainly coming from the higher earning days as well as the commencement of the 6 VLECs. On Page 10 of our AB pack, for Petroleum and Product Shipping, lower revenue recorded as compared to preceding and corresponding quarter mainly due to the lower TCE rates for midsized tankers and VLCCs as well as lower earning days. Higher PBT recorded in the preceding quarter mainly due to the one-off compensation for a contract negotiation that we received. On Page 11, for Offshore business segments, higher revenue recorded in current and preceding quarter, mainly coming from recognition of construction revenue and profit for a FPSO unit. The PBT recorded is actually in line with the revenue as we see now. And finally, in the last segment on Page 12 of our AB pack for Marine and Heavy Engineering segment, higher revenue recorded in the current quarter as compared to corresponding quarter mainly from higher revenue from an ongoing project. However, lower loss before tax as compared to preceding quarter, mainly due to higher profit from an ongoing project that [ has expensed ] now and higher loss before tax as compared to corresponding quarter, mainly due to lower revenue in Marine segment due to absence of conversion works during the quarter as well as lower profit from Heavy Engineering segment due to lower contribution from the [indiscernible] projects. Now I pass on to Vincent for the business update. Thank you.

Thanks, Eslin, and good evening to everyone. Thank you for joining us on this call. I will start with the market environment and starting on Page 14, LNG Shipping. Just looking at the graph there, although there was a surge in European gas demand in quarter 3 mainly due to lower wind and solar power generation over there, the LNG shipping rates -- spot rate has been relatively flat for the quarter, as you can see from the blue line. And on the other hand, short-term charter rate that's represented by the gray line has been strengthening over the period. This is mainly due to charterers jumping to secure tonnage ahead of the winter season. Post the third quarter in October, LNG charter rates actually have spiraled upwards above $100,000 a day given the energy shortage in a number of key consuming nations. Hence, we expect that the fourth quarter spot rates will be stronger for this year. On Page 15, we highlight the deliveries of LNG carriers, the projected deliveries for the next few years. And you can see that the order book for LNG carriers remains relatively high with approximately 20% of the fleet right now, with some 69 vessels expected to be ordered in 2021 as compared to 55 for 2020. This is to meet new tonnage requirements for upcoming LNG projects and higher demand. Turning now to the Petroleum Shipping market. As you can see from the graph as well, the market in the third quarter has continued to weaken, has been very, very low, especially for the VLCC rates. However, we are cautiously optimistic that there could be some moderate improvements in quarter 4 for -- on account of winter. We have seen that October spot rates have strengthened our [indiscernible] from a very low base. So although we don't expect a huge rally in this year, on the medium term, our -- we believe that the market prospects remain positive with likely improvements towards the second half of next year, whereby tanker demand is projected to return closer to 2019 levels on the back of OPEC+ phased supply increases as well as continued economic recovery. This is also supported by the order book on page -- the following page, Page 17. You can see that the order book is relatively moderate. We don't expect fleet growth to be very high for Petroleum segment. At the moment, the order book, as a percentage of the fleet size, is around 8% to 13% of the fleet depending on the type of ship. And at the same time, if you see the chart on the right, you can find that scrapping has been picking up pace quite a lot in the quarter. And so far, year-to-date figures for 9 months have exceeded the total for 2019 and 2020 by quite a far distance. So this is an encouraging sign for recovery of rates due to -- hopefully, it will reduce the tonnage oversupply over a period of time. Turning now to the Offshore segment on Page 18. Not much here to -- that's different from the last quarter. As you can see, because the oil prices have remained strong, with expectations of continued global economic recovery, the outlook for offshore CapEx continues to be positive. We expect that offshore CapEx levels would surpass pre-crisis levels by next year. And similarly, for FPSO prospects, it continues to be positive with awards coming from Latin America, Asia Pacific and Africa over the next 2 years or so. That concludes the market environment. And I will now move on to business updates, starting again with the LNG business. The LNG Shipping business, we have taken delivery of the second vessel that we have under the joint venture with NYK and Mitsubishi Corporation. This is the Diamond Gas Victoria in July. This will go under an 18-year time charter contract. At the same time, LNG business continues to explore new opportunities for both conventional and nonconventional solutions. For the Petroleum and Product Shipping segment on Page 21, the current portfolio mix is at 68:32 term to spot. This is a slight decrease from the second quarter of 72:28. The main reason for this is due to the Aframax fleet. There has been a lower volume of lightering activities during the quarter on the back of overall demand reduction during the quarter. And as a result, quite a number of charters have used to light their own excess tonnage to do lightering instead of employing our ships. During the quarter, we have also chartered in 2 Aframaxes, so increasing our fleet size by 2. Going over to Offshore business. Currently Offshore business is still focused very much on execution of our Mero-3 project, but at the same time, still selectively sourcing for opportunities in our targeted markets. As for the litigation cases for Gumusut Kakap, GKL and MOMPL, which are covered on the next few pages, I will not go through. But just suffice to say that we are still continuing the legal process to pursue both cases. The final segment I will cover is on Marine and Heavy Engineering. In terms of milestones for the quarter, we are up -- year-to-date completed the repair and maintenance of 73 vessels including 10 LNG carriers. On the sustainability front, MHB has installed solar panels on its rooftop, which will allow us to generate 8.3 megawatts peak of electricity. The order book backlog as of September is MYR 2.5 billion. And the tender book is MYR 9 billion to MYR 10 billion as of September. So I think that concludes the presentation from my side. I hand you back to Navina.

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. Dana, over to you.

[Operator Instructions] Mr. Kong Ho Meng from UOB.

My name is Ho Meng from UOB Kay Hian. I have about 5 questions. If it's okay, I'll go through one by one. My first question is how much is the construction gain of the Mero-3 during the third quarter? Hello, can you hear me?

Yes. Can you hear me, Ho Meng? Azlan here.

Yes, yes. You've got my question, right? Yes.

Yes. I think year-to-date, we have recognized close to about USD 80 million or so.

1-8, $18 million?

8-0, 8-0 year-to-date.

8-0. That's on the P&L level, on the...

That's right.

Year-to-date or you mean for the 9 months last?

That's right.

Okay. All right. My second question is on the tax side, right? I noticed you updated in the Bursa tax where you've got the -- you continue to enjoy 100% shipping tax exemption up to 2023. So in relation to this, can I just double check with you whether that means your tax rate going forward will remain the same? And also do you also see -- in regard to the prosperity tax, do you see a negative impact? What is your final assessment on that?

Yes. In terms of the Section 54A shipping tax, we have actually been notified by the Mission Association of Shipowners who have been notified by MOT that the MOF has actually approved the extension to implement the tonnage tax by the end of 2023. So therefore, the existing exemption is still applicable up to the year-end of 2023. And in the event that we implement the tonnage tax, we hope that we'll be able to resolve this in the long term, whether the shipping tax [indiscernible] of the prosperity tax, which is actually a one-off tax in 2022, there is not going to be much impact for us.

Is it because of the shipping tax exemption so that's why you have -- you don't see any impact on the prosperity tax, nothing material?

Correct, correct. Because most of our entities, they are enjoying this or their [indiscernible] those kind of things.

Okay. Got it. I move forward quickly to my third question. I think previously, I did ask your team on -- because I noticed there are some -- PETRONAS has some issues with their cargoes exporting from the LNG terminal in [indiscernible]. But I do note that you have always guided that your long-term targets, regardless of whether the [indiscernible] terminal is exporting or not, it shouldn't be affected. But I just want to double check, because in your Bursa announcement, you did mention that the -- due to the pandemic, you did have some off-hire days in your LNG long-term charters. So I just want to check, are those off-hire days related to this issue? And also, yes, just -- can you comment on that?

No, no, they are not due to this issue. As my team has rightly guided you, they -- we enjoy the long-term contracts. So we will continue to benefit from the long-term contracts. Those off-hire days are due to COVID-19 cases or extended dry docking in 1 or 2 of -- a few vessels [indiscernible].

I see. How many days were the off-hire days for your LNG segment in the third quarter?

It was not much. I mean it was -- the impact was probably around USD 3 million to USD 4 million.

In terms of earnings impact?

Yes. The total impact up to the 9 months was around $3 million to $4 million for all the vessels that were affected.

Off-hire due to -- related to COVID-19?

Or extended dry docking.

Okay. All right. And moving over towards the fourth quarter, what is the outlook for the LNG side? Are you expecting a very full utilization because of the high gas demand worldwide?

Yes. I mean most of our vessels are on long-term contracts. So those will benefit. I mean, in terms of the ones on spot, correct me if I am wrong, team, I think roughly about 75% [indiscernible].

And the dry docking is probably close to 0 likely for the fourth quarter because of the demand -- because of the high demand, right?

Can someone help me here on the dry docking?

Yes, we do have docking for this quarter.

This quarter referring to third quarter or the upcoming fourth quarter?

Third quarter -- I need help here. I think there are some, but not much. Because -- I don't have the number of days with me here. But of course, there's a plan docking around maybe 60 to 80 days for LNG.

Is that a [indiscernible] okay, right?

Plan, yes. Plan, yes.

Okay. Okay. Got it. Okay. Maybe I will quickly move forward to my next question. In terms of the PETRONAS outlook for your -- for the fourth quarter -- the upcoming fourth quarter, I think in the past few weeks, there were [indiscernible] where the Aframax fleet benefit because of the U.S. crude export price. So in the sense, do you see the same benefit to your Aframax fleet for both the lightering or any of the small contracts over there?

Yes...

Yes. Go ahead.

Yes. I think, as I mentioned during the call just now, there could be some benefit. In October, there is an increase, but because the increase is coming off a very low base. So even sort of a high percentage increase would not -- may not be such an impact in terms of dollar value because it's coming from a very low base, yes. So I think, because of that, I think not -- may not be that huge in terms of impact to our financials. [indiscernible], which I don't -- I'm not -- we will be very happy that happened, but may not happen.

Yes. Okay. Okay. So just a [indiscernible], how much is the spot exposure in your Aframax fleet at the moment?

I'll give you the normal split that we have, right, for quarter 3 just for everybody. VLCC is at 87:13 in terms of spot, Suezmax is 73:27 and Aframax is 54:46. So the balance -- actually, the Aframax fleet has been one that has gone down in terms of terms, has gone more into spot as for the reason I mentioned just now so -- due to the effective demand in the quarter. So if the spot rates go up, then theoretically, Afra fleet could theoretically benefit. It actually depends on how much the spot rate goes up for Afra, yes. But like I said, we've talked about percentage increase, it could be very high, but the absolute rates are not -- are quite low at the moment.

Okay. My last question here, I just want to check on assessing in terms of your cost base. I mean long time ago, you used to disclose the cost components of your Shipping segment. Right now, I just want to get some feel because now everybody is concerned on the inflation cost and everything, right? [ So cost of fuel is most obvious one ] because that may link to oil prices. But can you also comment on the other cost components of the Shipping segment? Do you see any pressures on that due to, say, higher material costs or higher crude costs or things like that?

Yes, I think there has been some increase in the bunker cost. Yes. So -- but I think we also are covered by our long-term charters. We only expose the bunker cost for our spot.

The long-term charters, where your bunker cost is kind of like pass-through, right? If I'm not mistaken?

That's right. It is the claims cost for the term charters.

Okay. And how about the other cost components? Are there any material risk that you foresee?

There are some. There are some, but it's still largely under control. There could be maybe about 2% to 3% impact in some of the areas.

Okay. Okay. So nothing major for [ now ] at the moment?

That's right. That's right.

Our next question, Mr. Alex Goh from AmBank Research [indiscernible] Berhad.

A few questions. Well, let me run through first with the Heavy Engineering division. There is a mention of cost provisions for an ongoing project. Could you refresh us which project is this referring to? And is there any -- what was the actual additional costs in the third quarter? And what -- is there any potential for recovery from the client?

Yes. We don't want to mention the exact name of the project, but this cost provision was more a cost provision that was booked in, in the first quarter, where we booked in quite a big provision in the first quarter.

It happened in the first quarter and not in the third quarter. Is that right?

No. Yes, in the -- if you look at the quarter-on-quarter performance for MHB, the losses are actually reducing quarter-on-quarter.

I see. Okay. Correct. And what about the potential of recovery from the client? Are you working on that? How much is the actual provision so far?

I mean, again, we're not going to disclose exactly what the provision is, but there are substantial claims relating to COVID-19, which we are in the midst of discussion with our client. And our client has a knowledge, to a certain extent, some of those costs.

Okay. Okay. Right. Coming back to the tax issue that Ho Meng mentioned. Okay, are we -- I want to come back to the part where the budget talks about the foreign income now being accessible, right, and where I think where dividend repatriation can be impacted. Internally, how would you assess the impact to MISC? Is there a way to mitigate that? I mean it may not just be 1 year, it maybe could be on an ongoing basis?

Yes. I think this is impacting almost everybody. Anybody who has got foreign operations, there will be some impact. I think this will mainly be a concern for our foreign investments. And we are looking into ways and means of how to mitigate this impact. But immediately in 2022, we don't see any big impact.

Yes. Okay. Okay. And coming back to your LNG. Could you -- I just want to be clear, how many percent of your vessels are currently on a fixed? And how many is actually on spot now currently?

It is 90% or so on long-term charter. Sorry, Vincent, please correct me if I'm wrong.

Yes, maybe I will go by the number of vessels. We have 4 vessels on what we call short-term charter. But all of them are currently on short-term charter. Means none of them are actually on spot and the short-term charters will extend until 2022 -- to some part of 2022.

Okay. So basically, what I'm trying to ask is that if LNG tanker rates were to run up in the fourth quarter, the LNG division is unlikely to benefit from that. Would I be right in saying that?

Partially right. We do have some of those short-term charters where we have an arrangement with the charterer for a floating rate. So there is a floor and a ceiling. So we do have an arrangement where we do benefit from movements in the spot rates, but not to the extent of a full spot exposure for 2 of the vessels.

I see. Okay. Only 2 of the vessels out of the entire LNG fleet has that?

Yes. For the long-term charters, those terms don't exist. These are only for the short-term ones. For the long-term charters, all the rates are fixed.

Okay. Based on what you know now, we've actually gone into cross October. We only now have about 2 more months left to go. Can we safely say that your thought what overall should be at least be as strong as your third quarter, if not stronger? Would we be safe to say that?

Maybe I have to seek my finance colleagues on this.

On balance, I think it will be slightly below the third quarter. But as a whole, for the whole year, I believe that will be comparable to last year if we strip out those normal provisions that we made for GKL.

What would be causing fourth quarter to be slightly lower than third quarter?

Your question is on LNG only or for the whole company, for the group?

Basically, on overall, LNG and all divisions included.

I see. Okay. I think that -- yes, just a clarification.

We will probably see a lower performance from the Offshore unit as we're booking some of the fuel cost and also some of the interest costs relating to the -- during construction for the Mero project.

Why would Offshore division weaken in fourth quarter? Shouldn't it be quite the same as well in the third quarter because you'll still be recognizing the construction side of the Mero-3 or unless you are looking at a slower construction progress?

No, no. You see the way that the costs need to be recognized. In the early part of the project, we have actually recognized a high margin, right? But as we make progress, then we're going to gravitate towards a lower margin as we bring in all the costs. But again, this is all just finance's accounting. Based on finance's accounting, we are supposed to recognize the construction profit and all those. But really we should be [indiscernible] with the cash flow.

I see. Okay. The reason why I'm asking is traditionally your fourth quarter tends to be stronger, sir, right? I'm just wondering whether that is going to be replicated or under -- because under the new normal things have actually changed in such a way that it's going to skew your normal seasonal trends.