MISC Berhad (MISC) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to MISC's Quarter 1 FY 2022 Analyst Briefing Conference Call. Ausmal from MISC Investor Relations team will be -- will run through the agenda for today's briefing. Ausmal, over to you.

Thank you, Anna. Very good evening, ladies and gentlemen. Thank you for participating in our first quarter financial year 2022 analyst briefing. We have with us today the Cik Raja Azlan,Vice President Finance; and Cik Zahid Osman, Vice President, Corporate Planning; Cik Eslin Halimi, Head of Financial Reporting, Governance and Budget, Finance; and Mr. Vincent Ng, General Manager, Corporate Planning. Before we start with the presentation, I would like to bring your attention to the disclaimer slide. During the presentation, we may make some forward-looking statements in 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 first quarter financial year 2022 financial performance. Cik Eslin, over to you.

Good evening. Thank you, Ausmal. Thank you to the participants for joining MISC Berhad's Quarter 1 Financial Year 2022 Analyst Briefing. I would like to bring your attention to Page 3 of our analyst briefing pack. Lower revenue for the quarter, mainly due to the lower construction revenue from the conversion of an FPSO. However, this was offset by the higher revenue from Petroleum segment mainly due to the higher freight rates for the midsized tanker segment. Lower profit before sales from operations during the quarter mainly due to lower share of profit recognized in the Offshore segment following the recognition of a gain from the contract extension that we had in the preceding quarter. This was offset by the higher profit before tax from operations from heavy engineering due to the additional cost provisions that were recognized for the ongoing project in the previous preceding quarter. Moving on to Page 4 of our AB pack. Higher revenue coming from higher revenue from Petroleum segment due to the higher blended rates in the midsize tanker segment. Higher revenue also coming from the Heavy Engineering segment due to the higher activities for ongoing heavy engineering projects and higher dry docking activities in the current quarter. Revenue also recorded a positive from Offshore segment due to the recognition of construction revenue for FPSO profit and higher revenue also recorded from the GAS segment due to higher earning days result of the lease commencement of VLEC. Lower profit before tax from operations during the quarter mainly due to lower profit before tax from operations coming from the Offshore segment due to the increase in total construction cost of an FPSO due to global supply chain issues and China lockdown impact. This was, however, offsetted by the higher profit before tax from operations from heavy engineering due to higher revenue during the quarter, as mentioned earlier, as well as in the previous corresponding quarter, there was an additional cost provision recognized for an ongoing project. Higher profit before tax also coming from GAS segments due to higher earning days, as mentioned in the revenue section earlier. On Page 5 of AB pack, our cash flow and profit from operations shows that it continuously recorded original level, especially our CFO, comparing between preceding and corresponding quarter, mainly due to the higher operating performance as well as improved collection that we had in the current quarter. On Page 7 for cash and debt balances, lower balances that can be seen in the current quarter, mainly due to the repayment of an existing loan that we had, and this is part of our financing plan taking into account the recent completion of the bond issuance program with [indiscernible]. Next, going on to the financial performance by business segment. On Page 9, for GAS & Asset Solutions, revenue and profit before tax were quite stable between the comparative quarters, mainly coming from higher earning days as well as commitment of 5 [indiscernible]. Next page, on Page 10 for Petroleum & Product Shipping segment. Higher revenue recorded as compared to preceding and corresponding quarter, mainly due to higher TCE rates for midsized tankers that I explained earlier. Lower PBT that you can see recorded in preceding quarters, a bit lower mainly due to reduced margin on freight rate due to higher voyage and operational costs that happened in this quarter. On Page 11, for Offshore business segment. Lower revenue recorded as compared to preceding and corresponding quarter, mainly due to the lower revenue recognition of construction revenue for the FPSO unit. Our profit before tax as compared to the preceding quarter was lower, mainly due to the lower share of profit from the JV that we earn again on contract session that we had in the previous preceding quarter in Q4 2021, whereas lower profit before tax as compared to the corresponding quarter is mainly due to increase in total construction costs of FPSO due to global supply chain issue and China lookdown impact. Finally, in the last [indiscernible] on Page 12, for Marine & Heavy Engineering, revenue recorded as compared to corresponding quarter, higher mainly due to the ongoing projects as well as by revenue that we earned from dry docking activities. For profit -- minimum profit shown as compared to the both quarters is because in the previous 2 quarters, there was an additional cost provision that were recognized for an ongoing project. With that, I'll pass to Vincent for the market update. Thank you.

Thank you, Eslin, and good evening, everyone. Hello. Thanks for joining us on this call. I will take you through the market environment first. Starting with LNG on Page 14 on your slide. If you recall, after a record winter season, LNG spot rates have fallen quite steeply in the first quarter of 2022. As you know, towards the end of the quarter or the later part of the quarter, there was higher LNG imports by European countries who are seeking to reduce their reliance on Russian pipe gas arising from the Russia-Ukraine conflict. And this was partly offset by a lesser demand from Asia, mainly due to China lockdowns as well as high LNG prices. Net-net, as a result of this impact, there was a diversion of Asian-bound cargoes to Europe impacting tone-mile demand. On the other hand, if you look at the gray line, which is the time charter, the 3-year time charter rate, these have firmed over the same period. Going to Page 15. From the chart, you can see that there will be lower deliveries of LNG carriers this year in 2022. However, you can see the rising trend in 2023 and 2024 to a multiyear high. There has been very strong ordering activity in the first quarter of 2022 and is expected to remain high for the rest of the year. So we expect more higher deliveries in '24, '25 and '26. More LNG projects are expected to reach FID over the next 2 years due to a positive demand outlook. Europe's aim to diversify away from piped gas from Russia is also expected to support an even stronger LNG project sanctioning environment. And we noted that a number of U.S. projects have been advancing significantly in recent months. Moving on to the Petroleum segment. This has also been impacted by the Russian-Ukraine war. If you recall, the last quarter was quite a poor quarter in terms of the end of 2021. However, we noticed that the rates have risen in 2022 for the first quarter and particularly for the Suezmax and Aframax segments. And this has also been a result of the war in Ukraine, leading to changes in oil trade patterns and as a result of which they have longer-haul routes. With Western countries shunning Russian oil, more Russian crude has been shipped up to the Eastern areas of China and India, while Europe has been importing oil from other newer regions. This has supported the demand for midsized tankers. On the other hand, the VLCC rates have remained soft given that a lot of it has been employed in long-haul routes between U.S. and China. So China lockdown has also impacted the demand for VLCC, the cargoes. In the immediate term, there are still some risks on the global environment in terms of the weakening global economy and combined with elevated oil prices and continued China lockdown. Going to Page 17. As you can see on the chart on the left, although there will be more new build deliveries in 2022, the overall order book for tankers are relatively small. On the whole, the current tanker order book as a share of the fleet stood at a record low of about 6% for -- at the start of quarter 2, 2022. And on the other hand, if you look at the chart on the right, the demolition activity has remained limited. Although the short-term outlook remains quite uncertain, given the geopolitical situation in Europe, we expect that there will be gradual demand recovery over the medium term and coupled with the positive environment in terms of a slow fleet growth, and this should improve the conditions for the tanker market in the medium term. Moving on to the Offshore segment on Page 18. Despite headwinds, I think, the outlook for the offshore CapEx spending continues to be positive, supported by the reopening of economies and borders gradual return to more normal levels of activity and higher prices and recovering [indiscernible]. The growth for FPSOs was expected to come mainly from Latin America, Africa and Asia Pacific over the next 12 to 24 months. That concludes the business environment, and I will now move over to the business update on Page 20. For the Gas Solutions, Gas Assets & Solutions segment that we will continue to explore opportunities in the conventional and nonconventional market. The Petroleum segment for the current quarter, the portfolio mix is 65:35 term to spot, which is a decrease from last quarter. In the first quarter of 2022, we took delivery of 4 new vessels, 2 DPSTs for Shell; 1 LNG dual-fuel VLCC for Total Energy, which is the world's first LNG dual-fuel VLCC; and one DPST for Petrobras. Subsequent to the quarter, we took the delivery of the second dual-fuel VLCC for Total Energy. During the same quarter, if you look at the next page, we sold one Aframax and redelivered 3 LR2 and one chemical vessels. We also like to report that in April, MISC through AET has signed an MOU with Lloyd's Register and Samsung Heavy Industries for the development and construction of 2 VLCCs, which can be operated on zero-emission fuel, mainly via ammonia, and which is targeted to enter into service in 2025 and 2026. For the Offshore business, our focus will be on the execution of our FPSO project that is ongoing, while at the same time, selectively sourcing for other opportunities. Finally, on Heavy Engineering, which is on Page 22. During the quarter, our MHB was awarded the provision of the front-end engineering design competition for the Kasawari Carbon Capture & Storage project from PETRONAS Carigali. The order book backlog as of March is MYR 1.9 billion, and the ongoing heavy engineering tenders is MYR 18 billion to MYR 19 billion. On the business development front, MHE has signed a strategic agreement with clean technology company, Silverstream Technologies, to support the business in Silverstream and lubrication technology, which is for purposes of reducing emissions. And finally, MHE has also entered into an alliance with Singapore-listed Dyna-Mac for the purpose of mutual cooperation and joined bidding on targeted international projects relating to module fabrication, vessel conversion, integration work for projects in the energy space. So that concludes my presentation. And I will now pass you back to Ausmal.

Thank you, Cik Eslin and Vincent, for the presentation on the financial performance and business update. 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. Anna, over to you.

[Operator Instructions] Your first question is from Steven Chan, who's from Kenanga.

Thank you for the call. I just have a couple of questions. I'll probably ask them one by one. The first question I have, can you remind us again, what happened in the last quarter, the share of it of joint ventures, was it unusually high? And what is the main reason for the decrease quarter-to-quarter?

In the previous quarter, preceding quarter, we had a contract extension for our JV. With that, with the extension, we recognized a gain from that contract extension. That is why in the preceding quarter, the number is much more higher than this quarter.

Okay. And also, my question -- second question is regarding the lockdowns in China. Just wondering how does it impact any of your operations, the Offshore business operations? Does it impact your -- the delivery of the narrow FPSO? And if so, will there be any penalties involved for any late deliveries or any changes to the project IRRs that we should be aware of?

Yes. Thank you, Steven. Azlan here. Yes, there has been some slippage as a result of the Ukraine conflict as well as the lockdown in China. And as a result, we have actually booked in some additional costs during this quarter. There's also been a slight slippage in the time as well. But nevertheless, the project still remains profitable, and it still is going to generate a decent return.

Can you just roughly guide us how -- roughly how long would the delays be? And how much has the cost risen? How much does this impact in total CapEx of the project?

Yes. I mean in terms of delay impact, today, we are looking at about 3 months delay. And in terms of cost impact between 5% to 7%.

Your next question is from Raymond Yap who's from CIMB.

So just a following up from Steven's question on the Mero-3. Azlan, could you share with us what is the potential completion right now for the Mero-3 versus your schedule? And what -- how many percentage points in the completion rate are you behind?

Yes. There's about -- I think, we are now 40% or so. And we are probably about 3% or 4% behind schedule.

Okay. Okay. All right.

But then again, Raymond, you will notice that we are not alone here. All the -- I mean, the majority of the FPSO players who are undertaking conversion projects in China at this time, most of them are facing the same problem now.

Okay. Are you able to -- general expansion in your completion, have you started negotiations with Petrobras or is it too soon to do so?

So we are working on it. We have informed them. And at the moment, it's going to -- we're trying to find ways to resolve the issues on the ground. But definitely, we will be going through that process now.

Okay. Has the lockdowns down already stopped?

It has improved, it has improved. I mean the lockdown in Shanghai has started to improve. We are seeing some improvement in terms of movement of people as well as equipment. But we are not completely out of the woods.

Okay. Azlan, could you remind me which [ yard ] are you using in China again?

Mainly in the Yantai, the CMC, Yantai.

Okay. Sorry, this is what [indiscernible] is it -- sorry what's the [ yard ] again?

CMC, Yantai.

Okay, okay. Right. I understand. So Yantai is actually in Shandong province, it's not in Shanghai. Has it been affected by the lockdown directly? Or is it indirectly because of the logistical issues via the Shanghai region?

Yes, the Bohai Bay has also been affected as well. Yantai is on the Bohai Bay.

Yantai is on the -- sorry, couldn't catch you?

Yes, you're right. It's in the Shandong province on the Bohai Bay.

Right? So was it affected by the lockdown because I hear Shanghai has been affected?

There are other locations as well that are also affected because you need to get people through -- people and equipment will come in to Shanghai to a large extent.

Okay. Okay. Sure. Okay. So one detailed question about the first quarter. How much was booking for construction revenue and profits?

Yes. I mean in terms of the first quarter, somewhere between MYR 100 to MYR 150 or so in terms of revenue.

All right. How about profits?

Yes, profit, we -- basically, we needed to rebase our numbers because we had to account for that some of the adjustment to cost. So therefore, we did need to make some cost adjustment. Now that's why you can probably read into it as you see the movement in the numbers between the quarters.

Okay. So it booked a loss, I mean, is it there was a negative contribution from the military construction?

Correct. Correct. But again, let me remind you, these are just finance lease accounting numbers, which are based on a set of assumptions. The cash flow is still intact. We will get the cash flow when the asset enters into surveys. So -- and then we have also been slightly taken a conservative approach in the assumptions for the finance lease accounting.

Okay. So just if I'm looking at your decline in the Offshore profit, it looks like maybe about MYR 10 million loss, I don't know. Is that too much?

Maybe not as high as that, Raymond. you're talking about CMC, right?

Yes.

No, not as high as that.

Okay. Okay. Sure. Okay. Just moving on to the tanker performance. So the first quarter tanker profit didn't really show any impact from the higher spot rate? Is that because the center rates are sort of lag and therefore, you only see it in the second quarter? And on that note, how has the tanker profit performance been so far in the second quarter?

Yes. I mean we have got a huge channel of our business, which is on time charters and those are not affected by the spot rate. And if you look at the rates, it was more good rates for the MSP, but the VLCC was not really a good in -- so Afra has benefited. Suezmax also has slightly benefited towards the end of the first quarter, but the VLCC the rates remain depressed now.

Okay. So were you impacted by the depressed spot rates by -- of the VLCCs in the first quarter? Or what is [indiscernible]

We were, to a certain extent, we were.

Okay. So you have some of the VLCCs on the spot market then, right? That's why you were negative the first quarter.

Yes.

Okay. Well, Vincent, you usually give us some breakdown of the spot exposure by tanker segment.

Yes, Raymond. I will do that now. Okay. Okay. Thank you, Anna. VLCC is 75% to 25%, which kind of answers your previous question. Suez is 58% to 42%. Aframax is 56% to 44%. So probably all the 3 segments have a higher spot exposure.

Wow. Okay. For the 25% for VLCC is much higher than the previous quarter. Last quarter, you only told us 6% spot, now it's 25%. Okay. So is there something deliberate that you're doing in order to try and get exposure to the spot market?

Not entirely. I think it's also a circumstantial because at the time, the rates are quite poor generally across the board. So decisions have to be taken at the operating level, whether to keep them -- renew them on a time charter or spot. So it was also quite difficult to get a time charter during that period.

Okay, sure. All right. So hopefully, your second quarter tanker performance will be better, yes, because it's just basically zero in the first quarter. So the last question I have is on LNG. So LNG profits did quite well in the first quarter compared to fourth quarter. So fourth quarter was about MYR 73 million, and the first quarter was MRY 84 million. So it's never been this high for a long time. What's the reason for the excellent LNG performance?

Yes, I think there were less dry docking days, number one. And I think in the previous quarter, there were some repairs.

Okay. How does the LNG segment look like?

Sorry. And also in the -- you're talking about Q4 to Q1 2022 or Q1 '21 to Q1 '22?

No. The last 6 months, so Q4...

Yes so that will be explained, as I said, by dry docking days and certain repairs that we incurred in the previous quarters.

Okay. Okay. And how does the LNG performance were like going into the next 3 quarters? Can you still maintain 4 million times 4 something like that?

Yes. I mean the -- we hope that everything will be stable. But of course, we need to manage the situation with COVID and also potential of ideas and all that. But burying unforeseen circumstances, we think that is quite stable in the Gas business.

[Operator Instructions] Your next question is from Ho Meng from UOB Kay Hian.

I have several questions. If you don't mind, I'll go one by one. The first is to follow up from a question earlier. So may we know what is for exposure of the tankers in the second quarter so far?

We don't have that information because it's -- yes, we mean provide the information is accumulative for the quarter. So we don't track it on a day-to-day basis. We don't have the information for you, unfortunately.

But roughly, is the VLCC spot mix still as high as what it was in the third quarter for the month of April and May?

I think it's relatively high.

What was the reason for the higher spot, what do you call it, the higher spot mix for VLLC?

I think the market is generally weak as for VLCCs at the moment. As I mentioned, there's been lower demand from China. As you know, there's been weakening phenomena, the lockdowns contribute to the debt as well as the lower demand for oil in China. So overall, demand for VLCCs is quite weak weather or not -- or whether for time charter or for spot. The market has picked up is on the shorter voyages for midsized tankers because of Europe.

All right. Understood. Okay. On the second -- okay. My next question is in regards to -- I remember you mentioned earlier that you have repaid one loan, and this was refinanced and is also refinanced. May I know what loan is this? And what has happened there?

Yes. I mean we repeat during the quarter, we repaid one of the project financing for one of the offshore projects, and we then subsequently refinanced that with the bond that we should.

Okay. For the entire bond issuance, which was roughly MYR 3 billion, right -- sorry...

It was USD1 billion, USD1 billion.

[indiscernible] Have you repaid this loan?

Correct. Correct. I mean we repaid the loan first then subsequently, we raised the bond. So there was about 2, 3 weeks [ gap ] in the time.

Okay. Is this loan the one that -- where you mentioned in the annual report that they had the [indiscernible] quite enjoyment content?

Correct. You're right. You are right.

So the bankers have decided to exercise the option to get out of this arrangement, is it?

Yes. Some of the bankers decided to do that. The other bankers were only willing to lend on a temporary solution, and we wanted a permanent solution. So therefore, we made a decision to refinance this loan and raise the bond so that we have a more long-term solution to this issue.

Understood. Understood. Also in that sense, I noticed your finance cost in the quarter is a bit higher than normal. Are there any one-off items within the finance costs like one-off that will not recur in the next quarters? Or you know is level of finance cost, higher levels [indiscernible] yes.

Yes, there is about MYR 40 million due to the amortization of the upfront fees, which we had to write-off arising from the repayment of the project financing loan that we're talking about.

Okay. MYR 40 million to MYR 50 million terms, right?

Up to -- I think, it's about MYR 35 billion to MYR 40 million.

Okay. MYR 35 million to MYR 40 million. So that means subsequently, in second quarter, your next quarter onward is the finance costs should normalize back to low 100s.

Correct. You're right. Yes.

Okay. Got it. And in terms of this particular project, is there -- I believe is linked to the litigation that you have with the client right. Any updates on the litigation so far? Is there a more complicated one at the moment? Yes.

Unfortunately, there is not a real concrete update. This is going to be a long run in fairyland.

Okay. Okay. Because this particular project, the [indiscernible] has been giving issues now and then. So I don't know, any technical issues that come from these productions, do they use that to raise against you in the cost cases? Or it's nothing to do with any production issue at all?

No, no, no. It's -- basically, we are fighting on the arbitration issue, we disagree on the arbitration outcome.

Right, right. So nothing to do with any technical issues that come up in recent times?

I mean, production is going on as usual.

Okay. Noted on that. So -- okay. My next question is just to quickly ask. Petronas has been looking for LNG new -- better new built. And I think you were probably looking to bid for those, what's its outcome so far? Have they awarded? And are you -- are you expecting to get any new investments from -- for their new build program or not? Yes, just to get the correct concept there.

Zahid here. I mean I think I mean the tendering process is still ongoing. We understand that there is the final stage in the Petronas assessment. So hopefully, we should hear the outcome of that tendering very soon.

Understood. In a sense, are you -- which year are you tying up with? Because from my understanding, all the bidders have to have some sort of tie-up with the yard of choice for particular process. So are you -- you're paying?

Petronas have identified all the 4 yet 3 in Korea, the Hyundai, the Samsung and [indiscernible] and as well as the one in China. So they have identified all these yards are okay for them for the owners to tie with. So depending on the owners' patent, then you can pick any of the [ yard ] for Petronas [indiscernible].

I see. Are you able to share maybe I don't know, some color of how many vessels you can realistically secure?

I think we will -- I mean, I will not be able to comment certainly because the tendering process is still ongoing. And so any info from us will be very speculative. I don't think it's...

Okay. Understood. [indiscernible] delivery date for the vessels, would it be around 2025, 2026, which would you expect to...

Yes, I think that is correct. That's a period where we acquired the vessels between 2025 and 2026.

Okay. So that could be in time to replace some of your older vessels that may aspire then, right?

Certainly, that's one of the intention of Petronas when they came out with this standard. So first is to support the growing LNG business as well as try to see the replacement of the old [indiscernible] that they have.