MISC Berhad (MISC) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to MISC's Q2 FY '2022 Analyst Briefing Conference Call. Azmir from MISC Investor Relations team will run through the agenda for today's briefing. Azmir, over to you.

Thank you, Diana. Very good evening, ladies and gentlemen. Thank you for participating in our second quarter financial year 2022 Analyst briefing. We have with us today, Encik Zahid Osman, Vice President of Corporate Planning; and Encik Raja Azlan Shah Raja Azwa, Vice President of Finance; Cik Eslin Halimi, Head of Financial Reporting, Governance & Budget from Finance; Mr. Vincent Ng, General Manager of 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 performance, and it 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 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 2022 financial performance. Cik Eslin, over to you.

Good evening, everyone. Thank you, Azmir. Thank you to the participants for joining MISC Berhad Quarter 2 financial year and 2022 analyst briefing. First of all, I would like to bring your attention to Page 3 of our AB pack. Higher revenue for the quarter, mainly due to the higher revenue contributed from the Petroleum segment as a result of higher freight rates from the midsized bankers. Also higher construction revenue from the completion of an FPSO. Lower profit before tax from operations during the quarter mainly due to the lower profit before tax from the offshore segment used with the increase in total construction costs for the FPSO due to global supply chain issues and China lockdown impact. However, this negative contribution was [indiscernible] but positive contribution i.e., higher profit before tax from operations from Petroleum segment due to the higher freight rates as mentioned above. In this quarter, in the nonrecurring items that are impairment losses for the noncurrent assets being captured at this quarter. Moving on to Page 4 of our EBITDA. Higher revenue for the quarter coming from higher revenue from petroleum segment mainly due to higher [indiscernible] on the midsized tanker segment. Higher revenue also coming from the offshore segment, is the direct addition of constructive revenue for the FPSO unit. Revenue also contributed a positive from the heavy engineering segment, mainly due to the higher activities for ongoing heavy engineering projects and higher dry-docking activities in the current quarter. Higher revenue also can be seen from the Gas segment due to the higher earnings days as a result of [indiscernible] in the current quarter. Moving on to lower profit before tax from operations during the quarter. Lower profit mainly coming from the offshore segment due to the increase in total construction costs due to global supply chain issues and China lockdown impact during the FPSO project that we have currently [indiscernible] lower profit before tax of operations offset by the higher profit before tax operations from heavy engineering segment due to the higher revenue during the quarter [indiscernible] as well as gas [indiscernible] provisions for [indiscernible] in the current quarter. At the same time, higher profit before tax from the operations was due to increase from the Gas segment due to the higher earning days [indiscernible]. Moving to Page 5 for cash flow and profit before tax from operations setup. Our cash flow from operation show a lower balance compared to the link quarter mainly due to the open expenses that we inject in the current quarter where [indiscernible] CFO as compared to the corresponding quarter was higher due to the collection that we've received from our clients. Moving on to Page 7. Cash and debt balances. Our cash balance as at 30 of June 2022 remains healthy, had a closing balance of about USD 1.9 billion. [indiscernible] debt balances decreased in quarter 1 2022 [indiscernible] of loans that [indiscernible] for the offshore segment. However, cash and tax balances [indiscernible] in quarter 2, typically to mainly coming from the recent USD 1 billion bond issuance that we had [indiscernible] Now we are looking at the financial performance by business segment. On Page 9, for Gas & Asset Solutions, our revenue that you can see fluctuating because of the dry-docking activities I mentioned earlier. However, I would like to bring the attention to the impairment that we capture in this current quarter. This impairment mainly gives an [indiscernible] that we do an impairment assessment as a result of the [indiscernible] the expiry. This environment also was done based on the market valuation, which [indiscernible] environmental regulations as well as technological advancements with EEXI and CII. As you all know, impairment is not new to MISC. It was done on a regular basis for the accounting standard. So normally, the drop in market value is market driven, and we also can see from the peers [indiscernible] they are also reporting impairments in the account. And we would like just to emphasize that this is purely an accounting statement. So most of the assets are actually close to the end of the [indiscernible] whereby we fully recovered the capital investment during the CapEx [indiscernible]. Not withstanding that from the asset that approaching [indiscernible], we normally acquire [indiscernible] and at the same time we also make sure we decline it for potential expansion. On Page 10, for Petroleum & Product Shipping segment. Our higher revenue was compared to preceding and corresponding quarter due to the higher TCE for midsized tankers. The profit before tax as compared to preceding quarter, also higher due to the blended TCE as mentioned above. As for the comparison against corresponding quarter, in the previous corresponding quarter, there has been one-off compensation that we received from contract negotiations with our clients . On Page 11, for offshore business segment, higher revenue that you can see here compared to preceding and corresponding quarter, mainly due to the revenue recognition as the projects progress every quarter. I would like also to bring attention to the loss that we have in this third quarter, mainly coming from the current situation, which is COVID-19 pandemic [indiscernible] for the past 2 years and which -- some countries have not started to ease the restriction. However, because [indiscernible] in China, China is still under district lockdown as of quarter 2 2022. Furthermore, Ukraine and Russia war, along with the worsening global [indiscernible] issues also impacted the project program and [indiscernible] several other projects progressing in China. So with the above situation, we [indiscernible] our project situation. And this quarter, we have incorporated the latest additional deals as well as booking additional provisional impact, which has resulted in negative [indiscernible] adjustments, which finally impact because I could [indiscernible] recognize during the quarter. To manage these challenges, we are actively looking at a few things. Firstly, coordinating the various parties to address and overcome the movement restriction in China to minimize the impact of projects [indiscernible] We're also working with suppliers to minimize the impact on projects scheduled. And at the same time, we are also monitoring China's easing of this COVID-19 restriction. Finally, despite these challenges, the overall project is still profitable. We will continue to closely monitor the cost, but believe whatever provision that we have at this quarter [indiscernible] for the time being. Finally, in the last segment on Page 12 for Marine and Heavy Engineering. Lower revenue [indiscernible] compared to 15% mainly due to lower revenue from ongoing projects and offset by the higher revenue from [indiscernible]. But for the profit before tax operation as compared to preceding and corresponding quarters, the increase is because of the reversal of cost provision [indiscernible] and higher [indiscernible] in the marine segment during the quarter. Thank you. And for now, I'll hand over to Vincent for the market environment and business update.

Thank you, Eslin. Good evening, everyone. Turning to Page 14, where we have the LNG shipping market rate. And just draw your attention to the blue color line, which is the spot rate for shipping. Historically, the second quarter of the year is usually the low season for LNG shipping, but this year has been exceptionally strong with rising 82% quarter-on-quarter. This has been driven by very high demand for LNG cargo, especially from the European Union as well as the restocking of gas for the upcoming winter in the Northern Hemisphere. As you may have read, the EU is aiming to get through the coming winter with more LNG imports to replace Russian pipe care. Contractor rates are also continue to rise due to some of the charterers taking on term charter positions to cover for geopolitical uncertainties. Going to the Page 15. This is on the supply side. You will notice that the deliveries of LNGC or LNG carriers will be relatively low this year. However, it would continue to rise [ and we show a ] new peak in 2024 of 75 vessels. A record 78 vessels have been ordered in the first half of this year compared to only 23 in the corresponding quarter in 2021. The global LNG market has been very tight due to lack of new supplies and reduced investments in recent years, with most major producers operating close to full capacity. Given the positive outlook for LNG, this is expected to result in accelerated sanctioning of planned LNG export projects, which will in turn create demand for new LNG carriers. For example, in this year alone, in the last few months, we have had several major sanctions of projects in the U.S. Plaquemines LNG in Louisiana has achieved FID of 13 million tonnes per annum and Corpus Christi expansion project by Cheniere energy has also reached FID. This has 10 million tonnes per annum. For the rest of the year, we expect even more projects to be also approved or sanctioned, including potentially [indiscernible] and some other North American projects. Such projects will provide new growth opportunities for our MISC Gas segment. Turning now to Petroleum Shipping on Page 16. This has been a mixed fortune for our petroleum fleet. On the one hand, VLCC market has remained in the doldrums with reduced oil demand from China due to the zero COVID policy lockdown and also changes in street routes arising from the Ukraine war that has favored a midsized tanker over VLCC. As for -- on the other hand, we see that for the midsized tankers, Suezmaxes and Aframaxes, rates have been very strong during the second quarter. As you know, Europe had shunned Russian oil, which has then been diverted to China and India, leading to higher tonne-mile demand for midsized tankers. This step is expected to continue as U.S. decided to ban most Russian oil imports by the end of 2022. In the near term, the demand outlook for tankers being positive with continued recovery in global oil demand and supply, particularly due to the some recent easing of China lockdown and the gradual increase of OpEx part of production, and as well as by the shifting in the [ trialing ] leading to longer hault. However, this is tempered by downside risk of inflation and economic slowdown. Turning to the supply sector for tanker market on Page 17. 2022 will see a relatively high volume of deliveries compared to the last few years, while [ demolition ] activity has been low so far. However, if we look forward, you can see that the fleet growth will be slow going forward as the order book is currently at a historic low. In this year alone, new orders have remained very low amid high newbuilding prices, lack of yard space, prevailing tonnage oversupply as well as uncertainty over environmental regulations. In the medium term, we expect that there will be gradual demand recovery coupled with slow peak growth that would support improvement in market conditions. In the meantime, our Petroleum unit will continue to build a long-term secure income primarily to our [indiscernible] and rejuvenation of the fleet, especially for LNG [indiscernible]. Moving on to the next segment, which is offshore. With the prevailing elevated oil prices and the return of the energy security agenda to the forefront, this is expected to create a surge in upstream capital investment over the next 5 years. The global offshore E&P CapEx spending is expected to increase 20% in 2022 compared to 2021, with Latin America and Asia Pacific accounting for nearly half of the total. Demand for FPSO expected to remain good with increasing [ awards ] over the next few years, most of which will be in South America, particularly in Brazil and Guyana. That tells us the market environment. I shall now take you through the business update. Firstly, on the Gas business, you would have read that we have recently announced that the MISC together with its consortium partners, NYK, K-Line and China LNG have been awarded long-term Charters by Qatar Energy for 7 newbuild LNG carriers to be built by Hyundai Heavy Industries. Each consortium members hold 25% stake in this venture. And this LNGC will be delivered starting from 2025. Going to Page 21. The portfolio mix for the petroleum segment is currently 72:28 term to spot for the second quarter, increased from the first quarter 65:35 ratio. In the second quarter, our petroleum segment took delivery of 3 vessels, 1 LNG dual-fuel VLCC for TotalEnergies, 2 DPSTs for Shell and Petrobras respectively. We -- turning to the next page. We also sold 1 Aframax in the second quarter. And subsequent to the quarter in July, we took delivery of another DPST for Petrobras. So all in all, for the year, we have [indiscernible] deliveries, 6 DPSTs and 2 dual-fuel VLCCs. This brings AET DPST fleet to a total of 17 vessels, making us one of the top DPST players in the world. On the offshore side, we continue to be focused on the execution of [indiscernible] updated just now. Moving on finally to Heavy Engineering. During the quarter, the Marine business completed repair and maintenance of 28 vessels. The order book backlog as of June is MYR 1.7 billion, while approximately MYR 18 billion to MYR 19 billion worth of heavy engineering tenders have been submitted as of end of June. I think that wraps it up for my presentation, and I now hand you back to Azmir.

Thank you, 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. Diana, over to you.

[Operator Instructions] I have got [indiscernible] for the first question.

Hope, you guys can hear me. [indiscernible]. Thanks on the briefing here. I have a couple of questions. I will just ask them one by one. I'm not sure if this was mentioned earlier in the briefing or I probably missed it. But I would like to know what is the reason for the quarter-on-quarter drop in the gas and asset solution core profit, right? I think quarter-on-quarter on the revenue actually largely flattish, but there was actually a drop in the core profit, just want to know what [indiscernible].

Okay. Steven, thank you for your question. This is Emran here. So far as the gas solution, you are referring to the [indiscernible] or to the slides that were presented to you?

Both [indiscernible] similarly quarter-on-quarter earnings drop, but the revenue is largely flattish.

I see. Yes. I mean in the slide that was presented to you, we included the impairment as part of the PBT, the blue collar line.

Yes, yes.

But if you look at the [indiscernible] announcement for the gas unit, the profit is actually -- has actually gone up, even at the core operating profile for the -- for your slide, even if I reverse the impairment [indiscernible] quarter-to-quarter drop. A slight [indiscernible] impairment, there's a drop of about MYR 20 million, right? MYR 15 million to MYR 10 million. Those will be because of drydocking days in the current quarter.

Okay. Okay. Those will be drydocking data. And another question is on your Petroleum segment. You mentioned that year-on-year drop because last year, there was a recognition of a one-off [ game ] isn't it. I was just wondering what the amount is.

It's about USD 40 million to USD 45 million. There was a one-off payment made in the corresponding quarter last year.

Okay. USD 40 million to USD 45 million. Okay. My following question especially regarding your impairment here. I think you have mentioned earlier that the impairment was not -- was mainly done on the LNG vessels because of the assets being near contract expiry. If I didn't recall wrongly that during our [indiscernible] session with the CEO, there was a mention of actually impairments on your offshore business side because of the cost delays by [indiscernible] just wondering why is that not recognized this quarter and for guidance?

So those are not specified as impairment. Those are captured as part of the operation. So we have captured the losses or the cost overrun and the delay impact in the operating line. Those are already picking up.

So those [indiscernible] reflected already in your reported numbers. It won't come off as provisions or impairment loss.

No, no, it isn't. Because in the offshore segment, most of these are finance fees receivable. So there's hardly any impairment on them.

Okay. Okay. Understood. And my last question is as far as I understand, I think for the next couple of years, until at least 2025, there is about more than 10 LNG carriers still nearing contract expiration. Just wondering what are the plans for these carrier vessels are? Are they being able to be redeployed? And if so, what sort of CapEx is required [indiscernible] for redeposit?

Yes. I mean with these vessels, there's basically 2 core strategies that we are employing. Number one, we'll be trying to repurpose these vessels to floating storage or floating regas, FSU or FSRU, right? So in fact, given the Ukraine war, the demand for such units have suddenly increased. And we are currently working on 1 or 2 potential opportunities for these vessels. At the same time, we are also negotiating with the clients for potential extensions for some of these things because the client still need these [ vectors ] to serve the molecule. So those are certainly ongoing discussions.

Okay, okay. If we deploying the vessels in let's say, [ the most out of ] the market, let's say, a 3-year charter contract or let's say even in the spot market. Is that a viable strategy you guys are pursuing?

Yes. I mean -- the current market, I mean, is not -- recent [indiscernible] market has come down. And we will need to take a look at what exactly the additional investment required before we make that decision because there could be some life extension costs. And before we proceed to make such investment decision, we need to see whether the return makes sense or not. So we will look at that together with the discussions with the client.

Right. Okay. So it is possible that some of these [indiscernible] if the life extension cost is [indiscernible] the cycle.

Better possibility because some of these are very close to the -- I mean 4 to 5 years away from their end of life.

We have got Raymond next from CGS-CIMB.

[indiscernible] you can [indiscernible]

I mean [indiscernible] working out of [indiscernible]. There is a echo. I mean there's quite a echo [indiscernible]

Okay. I think [indiscernible].

That's better.

Yes. Okay. So the first question I have is concerning the FPSO, so-called cost provisions. May I know what was the accounting entry that you passed [indiscernible] make a provision to [indiscernible] What kind of accounting actually did you actually pass in the second quarter?

I mean given the finance lease receivables, we shouldn't be going to detail into the accounting treatment revenue. But essentially, what happened is that we provide -- we increased the total project cost. And the way this construction profit calculation works is that we then need to adjust the percentage of completion under the input method. And as a result of this adjustment, the P&L has to take in an additional hit. So that's just how the profits were affected this quarter.

Okay. So you basically reversed the [indiscernible] that were booked in prior quarters?

Yes, you could say that.

Okay. Because the potential completion is with you, so you can't be booking in the same amount of construction profit as you had booked before since the percentage of completion is now lower based on your total cost, which have bumped up the total CapEx of the project. May I know what's the revised CapEx for the project now?

As I said to you, total CapEx is probably about 9% higher [indiscernible].

9% higher from what base?

From the original estimate.

Could you remind what the original estimate?

Original estimate was maybe about MYR 1.8 billions to MYR 1.9 billions.

MYR 1.8 billions to MYR 1.9 billions. Alright.

It is talking about all components.

Yes.

There are various components. There are operating components, financing components. There's a few components in this estimate.

Okay. And what is the revised completion date?

I think last time, in the first quarter, we said about 3 months delay. I think we are booking in -- we have made provisions to reflect -- we rebased our numbers now and provided for an additional 3 months.

Okay. So now it's a sixth [indiscernible]

Correct. Correct. In addition to that, we have also put in additional contingency as well just to be on the safe side. And we believe that at this juncture, touchwood hopefully, there is sufficient provision to prevent against further surprises here.

Okay. So that contingency is part of the 9% increase, is it?

Correct. Correct.

Okay. And when is this expected to be sail-away now?

I think in 2024, it will be operational in 2024, but we can't disclose the exact month for you.

Operation in 2024. So is it sail-away in 2023 or only after [indiscernible] January 2024?

I mean it takes some time to get to the site. So I think either the end of '23 or the -- sorry, the beginning of '24. All of that has been taken into account in this 6-month delay that we have provided for, Raymond.

Okay. Because I think the original [indiscernible] guidance for end '23 [indiscernible] '24. So your guidance today doesn't seem to be any different?

No, no, [indiscernible] I think the original completion date was end of '23.

Okay. Sorry, I missed that. The original completion date was end of 2023.

Yes, yes.

And now you're saying that the completion date is going to be middle of 2024?

I think so. I think that is, yes, 6 months should be mid-'24.

Okay. So mid-'24, sail-away on mid-'24 for the oil.

Raymond, there will be some [indiscernible] I don't think we want to focus so much on the sail-away.

The sail-away is part of the process to deliver.

[indiscernible] there are periods in the team where you will have to do the installation and commissioning. So those dates will kind of move. So I don't think we want to get into that kind of level of detail.

[indiscernible] on the sail-away. Yes.

Okay. So can I take you back to the original guidance what you saying was going to be so-called "ready" by late 2023, early '24. That guidance was promised on [indiscernible] or sail-away?

The delivery.

There is a technical definition in the agreement [indiscernible] criteria. So it's specific to the agreement, but it's not for oil, It's prior to that.

Okay. So somewhere in [indiscernible], is that what you mean by delivery?

Yes. Yes.

Okay, okay, okay. So -- looking at the OBU on the associate line, it's making a lot in the second quarter. What is that?

Associate share, associate line.

Yes. I think it's -- it's a profit of [indiscernible] right.

Yes, yes, that's right. Isn't that all of the offshore associates? Is there anything else in there that might have caused the loss?

Yes, I mean, this relates to higher repair cost for one of our [indiscernible] under the joint venture.

Higher what?

Higher repair cost.

Repair cost. Okay, Okay. Next question going on to the petrol incentive side. Last quarter, you mentioned that the VLCCs were dragging us down. So I interpreted that the VLCCs in the first quarter actually made a loss due to the exposure in the spot market. Was it still not making in the second quarter?

Yes, yes. That's right.

Okay. So it's still not making in the second quarter there which probably -- you have the profit on the estimate side?

Yes. I think the [indiscernible] is back in the [indiscernible] the midsize is back on track, is the VLCC, that is still in the risk. But we have [indiscernible] operational strategies to sort of minimize the losses.

Okay. What are those strategies?

I mean we are saying 2 arrangements with some partners to get a better charter rate and these charter rates are slightly higher than the current market [indiscernible]

Okay. Well, VLCC rates have done very well since the end of the second quarter, do you think that you'll be able to make a profit on the VLCCs in the third quarter?

Raymond, Zahid here. See -- at the moment, it's very difficult to predict, but based on the current outlook, we do expect second half will be better than the first half [indiscernible] some of it [indiscernible] difficult to predict.

Okay. Could I know what kind of spot exposure do you have on your [indiscernible] in the second quarter?

One second. Let me give you the numbers, Raymond. Since I'm sharing that. I'll also share the term to spot ratio for the other quarters as well. For VLCC for second quarter is 70:30, term to spot. [indiscernible] is 42:58, and FMS is 69:31. Of course, we also have our DPST which is 100% on term.

Okay. So [indiscernible] because last quarter, I don't think [indiscernible] was 58%, was in the 40.

Yes, [indiscernible] gone down and VLCC has gone down, but Aframax is higher. But as you know, our Aframax still is the largest component, so the wastage will be higher on the Aframax and the DPST. Don't forget we have added 2 more DPSTs during the quarter.

Okay. Okay. But when you give the term to spot exposure for Aframax [indiscernible] you exclude the DPST [indiscernible]

The Aframax, there doesn't include DPST space or a separate category. So the DPST will add to the overall ratio of 72:28.

Right. Okay. Yes, I think [indiscernible] without the write-back in provisions for warranty in the second quarter, would MISC still make a profit?

It will be [indiscernible] there was [indiscernible] needed to absorb the corporate or the overhead. So there was still a loss before the [indiscernible].

Okay. But the losses are very marginal now compared to where we -- what we have seen in 2021, but this sort of run rate to be the case in the second half. So the overall full year results might be marginally loss making or marginally profitable. So somewhere plus/minus/breakeven kind of level?

So no, we expect to end the year more or less the same as you're reporting.

More or less the same as...

[indiscernible] we're reporting MYR 20 million rebate of profits in the first half. You should hope for a double of them at the end of the year.

Okay, alright.

Remember, we get a lot of kitchen thinking over the past few years, right, because of -- as we're trying to [indiscernible], we took a very prudent stance and we kitchen thinking the account. So there could be further write-backs. And also, we are pursuing a lot of COVID claims with our clients as well. So we are hopeful for some of these recoveries.

Okay. Yes. So in terms of the FPSO [indiscernible] the 6-month delay, have you agreed this with [indiscernible] imposing any [indiscernible] kind of penalties?

Yes, we have informed them. We have written to them, and we are starting the discussion with them. In fact, our head of the offshore unit just came back from Brazil and the discussion has started. And certainly, we will be pursuing all avenues to affect whatever recoveries that we are entitled to.

Our next question is from [ Sean Lee, ] RHB.

Can you guys hear me.

Yes.

Yes.

Okay. I am going to ask a couple of questions, maybe I'll do one by one. First of all, may I know how many vessels -- how many LNG carriers have been [indiscernible] this quarter?

About 10 [indiscernible]

About 10. And the bulk order [indiscernible] said these vessels are going to expire in the next years and hence [indiscernible].

Yes. I mean we need to review the [indiscernible] for expiry, but at the same time, we're also seeking to account the stricter environmental regulation under the EEXI and CII. And this has resulted in the [indiscernible] in the value.

Okay. [indiscernible] asking is just I'm just going to anticipate like moving forward, if there are more vessels closer to expiry. Can you expect a similar [indiscernible] impairment to be made on all these vessels?

I mean we will continue to review our portfolio of assets. And based on the value adjustment, there could be some more. Maybe not as much as we have taken in this time around. But I believe there could be some more impairment in the year end.

Okay. Okay. My next question is just regarding on the presentation of the data for your segment PBT, in the slide right. So all the blue color PBT line has already included in the nonrecurring item, right? So what I need to calculate the core is to strip the nonrecurring items, is that so?

Yes.

Yes.

Okay. Okay. And my last -- I mean I have 2 more questions. The third question is what is the percentage of commission for [indiscernible]?

I mean based on the accounting, the second quarter is about 48% or so, which is based on the improved [indiscernible]

Okay. So 48% completed. And I remember in the [indiscernible] you guys mentioned about 2 force majeure events were being actually returned to Petrobras. One is the Russian-Ukraine and otherwise, China lockdown. Of which the China lockdown issue has been acknowledged. What about the Russian-Ukraine war discussions. Has it also been approved by Petrobras?

I'll discussing [indiscernible].

Okay. Okay. So following -- in the next 2 quarters, we shouldn't be expecting any more corporations, right?