MISC Berhad (MISC) Earnings Call Transcript & Summary

A very good evening, ladies and gentlemen. Thank you for participating in our third quarter financial year of 2022 analyst briefing. I'm Navina from MISC's Investor Relations team. We have with us today Encik Zahid Osman, Vice President, Corporate Planning; Encik Raja Azlan Shah Raja Azwa, Vice President, Finance; Cik Eslin Halimi, Head of Financial Reporting, Governance & Budget, Finance; and Encik Azmir Feisal, Senior 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 Encik Azmir. At the end of the presentation, we will open the line for a Q&A session. With that, I pass the session to Cik Eslin for our first agenda, the update on MISC's third quarter 2022 financial performance.

Good evening. Thank you, Navina. Thank you to the participants for joining MISC Berhad quarter 3 FY 2022 analyst briefing. I would like to bring your attention to Page 3 to our AB pack. Higher revenue for the quarter mainly due to the higher construction revenue from of an FPSO as well as higher revenue from Petroleum segment, we needed to high rates for midsized tankers as well as higher earning days. Higher profit before tax from operations during the quarter mainly due to the higher profit before tax from operations from Petroleum segment due to higher freight rates as mentioned above as well as one-off compensation for contract renegotiation received from client. Higher profit before tax from operations also higher for Offshore segment due to the recognition of construction revenue, where in the previous preceding quarter, the capture, the increase in total construction cost of FPSO due to global supply chain issues and China lockdown impact. Moving on to Page 4 of the analyst briefing presentation that higher revenue coming from -- the higher revenue from Petroleum segment, mainly due to higher [ blended ] rate, midsized tanker segment and higher earning days. Higher revenue also coming from Offshore segment due to the recognition of construction revenue for FPSO unit. For the PBT from operations, higher PBT from operations really coming from the Petroleum segment as a result of the higher revenue, as mentioned above. Moving on to Page 5. Higher cash flow operations, mainly due to the higher collection received that we received from customers in the current period. On Page 7, cash and debt balances maintain at USD 1.9 billion and USD 4.4 billion since last quarter, respectively, after the USD 1 billion bond issuance in April 2022. Moving on to Page 9 of the presentation deck. On Page 9, the revenue and profit before tax for Gas Assets & Solutions were much stable between the corresponding quarters, mainly coming from higher earning days as well as [ compensation of $6 billion ] since early 2021. As for the preceding quarter, profit before tax was lower due to the impairment of the vessel that we [ reconnected ] previously. On Page 10 for the Petroleum & Product Shipping segment, higher revenue recorded as compared to preceding and corresponding quarter, mainly due to the higher [ TCE ] rates for midsized vessels. Higher profit before tax from operation recorded as compared to preceding quarter, mainly due to higher benefits [ received ] and the one-off compensation that we received from clients. On Page 11 for Offshore business segment, higher revenue recorded as compared to preceding and corresponding quarter, mainly due to higher revenue recognition from the fleet FPSO following improved progress in each quarter as the profit from operations mix coming from recognition of construction gain following the total project cost adjustment that we have made in the last preceding quarter. Finally, the last segment on Page 12. For Marine & Heavy Engineering segment, the revenue are relatively stable as compared to preceding and corresponding quarters. The profit before tax was better as compared the corresponding quarter, mainly due to the recovery of public net [ incomes ] and the recovery of [ dry docking ] activities since the reopening of orders on April this year. Thank you. With that, I hand over to Encik Azmir for the business update.

Thank you, Eslin. For market environment section, I will start off with the LNG Shipping side. From the chart, as you can see that LNG spot rates has further strengthened in Q3 2022, but then 46% in the quarter 3 from the previous quarter, was mainly driven by strengthening winter season demand towards year-end in Asia and Europe as well as higher European demand due to the prolonged Russia-Ukraine war. As a result, [ MISC ], among others, has accelerated its regasification project in the region in order to secure and cater more LNG imports. In line with the spot rate, time charter rates also increased due to [ some ] charter [ off taking ] term charter positions due to the push towards energy security, growing global demand for LNG and tight vessel availability. Moving on to the next slide. On the LNG new orders, a record high of new orders are expected from 2022, driven by Qatar's LNGC orders and surging European demand, where there were 124 vessels ordered as at mid Q3 2022 as compared to 78 in the first half of 2022. Ship building capacity and higher new building prices have also prompted ship owners to book slots for 2023, 2024 to 2026 delivery. We foresee shipping requirements in the future are expected to be robust by an increase in the FID of planned liquefaction projects, particularly in the U.S. and growing demand for LNG, especially in Europe. Moving on to the next slide. Petroleum shipping. In Q3 '22, all 3 segments of Petroleum tankers have shown further improvements in their rates due to changes in trade routes, ongoing recovery from COVID-19 impacts and supported by rebound in oil production. As you can see, VLCC earnings continued to rebound in Q3, mainly due to the increase in the U.S. crude flows to the Far East and South Asia. Similar situation in the midsized tanker segment, where the spot rate uptrend continues due to the reshuffling of trade routes prompted by EU’s ban on Russian imports as well as greater tonne-mile growth due to the Russian invasion of Ukraine. Notwithstanding this, the upcoming OPEC+ production restrictions are anticipated to keep oil supply tight this winter, capping any rise in freight rates. In addition, downside risk to the demand outlook means with a slowing global economy and the lack of improvement in Chinese oil demand. On the next slide is actually on tanker supply landscape. The order book trend for tanker market remained flat amid high newbuilding prices, lack of yard space, prevailing tonnage oversupply as well as uncertainty over decarbonization targets. Overall, scrapping activities remain low despite some slight pickup in the midsize tanker segment since last quarter. Moving on to the Offshore sector. There have not been any significant changes in the Offshore sector since the last quarter. Upstream CapEx investment is expected to remain high, driven by pickup in activity level, higher FIDs, renewed focus on the energy security agenda and the recovery of global economy despite impacts of inflation and supply chain disruptions. This is further apparent with an increase of 18% in 2022 from 2021 of global Offshore E&P CapEx spending, reaching an amount of USD 131 billion in 2022, the highest level since 2016, with Latin America and Asia Pacific accounting for nearly half of the total. Majority of the new FPSO projects over the next 12 to 24 months are expected to be mostly centered around South America, particularly in Brazil and Guyana. Next will be the business update for our core businesses. Gas business segment, MISC has signed long-term time charter contracts in September with SeaRiver Maritime, the wholly own subsidiary of Exxon Mobil for 2 more LNG carriers, extending its total to 4 LNG carriers. Additionally, MISC has also signed an agreement with Daewoo Shipbuilding & Marine Engineering of Korea for the construction of the newbuild in South Korea. In LNGC, we will be chartered by SeaRiver for a firm period of 10 years, and the charters for the vessels are expected to commence in 2026. Next slide. Recently, as you're aware, MISC through a consortium with NYK K-Line and CLNG in November has been awarded long-term Time Charter Party for 5 newbuild LNGCs by QatarEnergy, which together with the 7 long-term charter contracts secured in August, brings to a total of 12 newbuilding LNG carriers awarded by QatarEnergy to the consortium. As mentioned in the previous quarter, each consortium member will have equal interest of 25% in each awarded LNGC. This 5 newbuild had to be built by Hudong-Zhonghua Shipbuilding Group and expected to be delivered commencing in 2025 onwards and will serve the needs of QatarEnergy the transportation of LNG to various countries around the world. Moving on to the Petroleum business update. The current portfolio mix is at 72:28 term to spot, which is similar to the previous quarter. I shall now -- I'll share with you the breakdown of the portfolio mix for the 3 tanker segments as follows. For VLCC, it's 36 term and 64 spot, for Suezmax, 75 term and 25 spots and Aframax, 76 terms and 24 spots. Next, in September 2022, PTT and AET have signed a Memorandum of Understanding for the development and construction of two zero-emission Aframaxes to be powered by green ammonia. This is an initiative by both parties to encourage the use of green ammonia as main propulsion fuel. AET will select like a suitable shipyard and the two zero-emission dual-fuel tankers are to delivered to PTT for long-term charters in Q4 2025 and Q1 2026, respectively. This MoU illustrates PTT's and AET’s commitment to reduce greenhouse gas emissions from international shipping as energy efficiency improvement alone will not be sufficient. The next slide. Not long ago, AET has won Tanker of the Year award at the Tanker Shipping and Trade Conference Awards and Exhibition held in Greece on 10 November 2022. For its first LNG dual-fuel VLCC, which is Eagle Valence. The 2022 build vessel is on long-term charter to Total Energies. The award was open to tankers delivered since November 2021 and engaged in bulk liquid transport that sets new benchmark in design, environmental, operational, safety and technical performance. For Offshore business, the update will be they will still continue to focus on the execution of the new FPSO project in hand while selectively pursuing opportunities in targeted markets. Finally, in the Marine and Heavy Engineering business, the Marine Repair segment has completed repair and maintenance of 72 vessels of various categories, including 8 LNG carriers in Q3 2022. As for the Heavy Engineering, [ MISC ] was listed and subsequently awarded the provision of Front-End Engineering Design Competition for the Kasawari Carbon Capture & Storage project from PETRONAS Carigali Sdn Bhd. [ MISC ] has also supported another award, which is a contract from Sarawak Shell Berhad to undertake the engineering, procurement and construction, EPC, services of the Offshore platform for the Rosmari-Marjoram gas project, off the coast of Sarawak, offshore Malaysia. As of Q3 '22, the order book backlog is RM 2.2 billion and approximately RM 15 billion to RM 16 billion worth of Heavy Engineering tenders were submitted. That concludes my presentation. The remaining slides are advertisers for your reference. I will now pass back the session to Navina. Over to you, Navina.

Thank you, Azmir. [Operator Instructions] Firstly, we have Mr. Ben.

Can you hear me?

Yes.

Yes, we can.

My first question is around what I'm seeing is a big jump in your other income. It looks like 230 million there, please correct me if I'm wrong. And I just want to understand what's driving this? And I believe it's with the Petroleum tanker segment? And how should we think about this?

Thanks for the question, Ben. This is relating to the Petroleum segment's one-off contract renegotiation relating to the midsized tanker. We did something like this in the past 1 or 2 years where we've been renegotiating for the short term. So at this time, we took the opportunity to renegotiate one of the clauses for the longer term. And we managed to get very good one-off payment, which went straight to the bottom line during this quarter.

Okay. So if I understand correctly, you locked in with the customer for a longer period. And in order to do that, they have to pay you a one-off payment. Is that correct?

Correct. Correct. It's a one-off -- it is basically the removal of what we call an adjustment to the charter contract, which in order to remove that clause, they made a one-off payment to us.

Okay. Does this, in practice, just mean that they lock it in at a slightly lower charter?

If I can add, I think it's basically the charter contract, there's one portion of the charter is [ partly ] according to the market condition. And that is safe from now until the end of the contract. And the customer doesn't -- it doesn't like that. Once they [ believe ], we say we are fine with that. So we negotiated with some certain assumptions. So that's the compensation that we share for removing that uncertainty. It could be up. It could be down.

Okay. Okay. Understood. How many vessels are involved, roughly? Just want to get a sense of the scope.

Just 1.

Just 1.

Just 1. Okay. Okay. My second question is just around the potential for impairments in the fourth quarter. I know you tend to review your assets then. Is there any risk that we will see many provisions for Mero-3? How is the work going there? And also, I think as you mentioned before that LNG segment could have more impairments coming in, in the fourth quarter.

So far, as Mero-3, we are -- we hope that has no more. We are sort of -- the project is under control now. I believe that we have taken all the adjustments that we needed to take in second quarter. So I think we are not expecting to see any more for Mero for the rest of this year. And so far as the Gas division, yes, impairments is a fact of life for an asset-heavy company. Exactly how much? We're not sure because this is also dependent on the external valuation report for those vessels, which should be due for expiry over the next 3 years. So if you recall, during the second quarter, we booked in about close to 70 million of impairment. There could be a bit more in the fourth quarter.

Okay. I mean, just a sense of scale, is it going to be another 70 million, its going to be 140 million? I just want to understand how big an impact we need to think about.

I think we have taken the bar of the impact in the second quarter. If anything, this will be the residual impact, maybe somewhere between 10 million to 20 million also. Again, it's subject to the final valuation report.

Okay. And this affects the vessels expiring in the next 3 to 4 years. Did I hear that correctly?

That's right. That's right.

Secondly, we have .

So I am going to [ get ] quickly. Just want to double check, how do I -- in your fleet information schedule, you mentioned a total of 4 LNG newbuilds. But how do I tie back to all the contracts that you have announced, especially for the Qatar one, how do you divide over among this one?

I think this question -- the 4 vessels, there are 2 actually -- 2 for the first SRM, SRM 1, SRM 2. And the other 2 is actually the recent SRMs, SRM is SeaRiver Maritime. So together, it's 4 vessel of SRM [ builder ].

Okay. So it means this fall in the table is only the SRM 1 and the one that you won in the consortium for the QatarEnergy one, it's not in the table. Why is that?

Yes. I think we have shared with you, I mean, the [ version ] is actually included. It's -- in total, we have 11 for LNGC. But we haven't put a remark saying that 25% each actually.

Okay, okay. Okay. To my second question. In terms of the update for your LNG contracts, how many of them could be renewed to spot or have already renewed the spot in the near term? And in terms of lease for the 11 [ newbuilds ] that we have won, are the time charter risk consistent with what your projected on the slide where the time charter right now, it's more than $100,000. Yes, I think if you can share that.

Let me just answer that. I think that the first one with regards to the new contract that we won, whether -- your question is whether the charter is consistent with the 100 over 1,000 [ EBIT ], that's the existing charter of our carbon [ unit ].

What's in the market trajectory?

The current market is based on the short-term sentiment demand and supply. So if you look at the table by any brokers, the near-term charter for all the LNG vessels is in the digit -- I mean, 6 digits, 100 to 120. But when you -- that's a different story when you go for a tender for long-term charter. So at the moment, what we are getting is based on the market for the long-term charter, either 10-year or 15-year stuff. So you shouldn't make comparison for a short-term fluctuation, where the vessel can be delivered now compared to the vessel going to be delivered in 2025, '26, '27.

Okay. So for me to say, can I get a confirmation that the risk that you got is definitely below 100,000?

Yes. I mean it's below 100,000. If you -- if anybody has a vessel now available for long-term charter, then you can go for the market and get [ 104,000 ]. But for newbuild, you know the earlier delivery is 2025 or 2026, 2027.

Noted on that. And the kind of with higher CapEx now, I know that the CapEx for certain contracts like the Qatar may be still a bit of a discount, but CapEx is much higher now. And below $100,000 of charter rates that you still can get the high single-digit IRR, right, that you are guiding?

I think yes, mainly because even with the higher CapEx, that will be translated into, I mean, the development charter really for the next 10 or 15 years, based on the separate [ acceptable IRR ] or in our case, is return on equity level that we have set ourself for that.

And just to follow up on the spot. How many vessels you have now that could be renewed to spot?

Yes, for the -- we have 4 actually on the short-term charter. The earlier that will be expired will be -- there will be 3 in the first half of the '23 and 1 in second half of 2023.

So far for this year, in the past few months, those 3, were they like 3 that were renewed in the past few months, spot rate to another spot?

Yes. Sorry, I mean, how many, again?

Like were they -- like in the past few months, how many were renewed from spot to another spot?

There's none. Yes.

Okay. Got it. So 3 for first half of '23?

Yes.

Next is [ Freeman ].

Okay. So I have a couple of questions on the Mero-3. So just on the Offshore division. So I just grouped them all together. The first thing is the percentage of completion for Mero-3 stood at 48% at the end of June. May I know what it is at the end of September? And could you also share with me what the construction revenue and profit recognition was for the third quarter for the Mero-3? And also, again, on Offshore, there is a share of JV loss on the P&L amounting to MYR 26 million. May I know why the Offshore JVs are not earning a profit? This is -- this was the same situation in the second quarter as well.

So what was the first question again, percentage of competition was about 10% to 11% during this quarter. That was the first question. And so far as you're asking me for the quarter, I'll tell you for the whole year. We will record maybe about -- revenues of 800 million or so, 800 million to 900 million for the whole year. And because we are adjusting the construction profit due to some of the estimated cost overruns. In so far as -- at the project level, we are looking at a high single-digit margin for the whole -- I mean for the whole project.

Okay. I mean I'm looking for the third quarter specifically, just to understand your numbers a bit better.

Yes. The contribution of Mero in the third quarter is negligible because we have to carry forward some of the adjustments into the third quarter as well. This is maybe about 30 million, 40 million at the project level for Mero. This is the quarterly profit.

Okay. Because I think the Offshore pretax profit in your slide, it was put at around 26 million, 27 million, and that was much higher than the previous quarter.

Those figures that I put to you just now, before financing and overheads. So if you take into account financing over here, Mero will probably have made about 20 million during this third quarter.

Okay. Yes. Because the -- I think on Slide 12, you put a PBT of $21 million, which includes the share of loss in the JV and associates. So on the subsidiary level, it should be around USD 26 million, USD 27 million. So that's quite a big swing from the second quarter, which was a loss. So does that mean that you're booking in a lot more construction profit for the Mero-3 because of the faster construction progress?

And the fact that we -- the most of the adjustment was booked in the first and second quarter.

Okay. So you're saying that there were some cost adjustments in the third quarter as well?

As we disclosed to you the last time, remember?

No, I'm sorry. I don't remember. Could you remind me, please?

Yes. Remember, we said that because of the pandemic and the lockdown in China, we had certain problems in terms of getting equipment and people into site. And as a result, there was a delay in the project by 6 months, all right? So therefore, we had to bump up our costs, which then resulted in some cost adjustments in the first and second quarter. Those were -- because of those adjustments in those quarters, we have recorded losses for the project.

Okay. And that carried over into the third quarter, did it?

Because we have booked all the adjustments into the -- for the second quarter, the third quarter is profitable.

Okay. So there were no provisions in the third quarter. So by reference to the second quarter, clearly, the third quarter will just show the pure construction profits without actually having been contaminated by any adjustments?

Yes, there are some adjustments, but not as big as in the first and second quarter because you have to recognize the adjustment based on progress.

Okay. And if the -- if -- just to double check, 48% completion rate 30th June, last 10%, 11%. So that will be about 58%, 59%. Would that be...

That's right. That's right. It's 59%.

Okay. And when -- sorry, when are you supposed to deliver this vessel again?

Within 6 months, will be May 2024.

May 2024. Okay. So that's a 6-month delay from the original time frame that brings us to 2024. So that's about another 15 months, 16 months or so. Yes. Okay. 17 months, all right. Okay. Could I just ask Eslin a couple of financial questions?. If I go to the...

Sorry, we have to stop you because we have to give opportunity to the rest to ask questions. Yes, Ben.

I'm sorry I didn't realize that. Maybe this wasn't publicly answered earlier. Your contract adjustment, I cited a figure 231 million. That's just from the other income line that I can see, but how much is the exact figure here that should be considered one-off? I don't think that was answered.

The figure, Ben, is around there.

Okay. So [ 231 ] million is nonrecurring portion. Okay. That's also an [ answer ].

, you can go ahead.

Okay. Sorry, can I just ask for the number again that you told Ben just now, was that in ringgit or USD?

That was ringgit.