MISC Berhad (MISC) Earnings Call Transcript & Summary

A very good evening, ladies and gentlemen. Thank you for participating in our first quarter financial year 2023 analyst briefing. I am 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, Head of Financial Reporting, Governance and Budget, Finance; Mr. [indiscernible] Senior Corporate Channel Corporate Planning. Before we start with the presentation, I would like to bring your attention to the disclaimer slide. This presentation contains some forward-looking statements with 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. With that, I would like to invite Encik Zahid for his introductory remarks on the quarter's key highlights and business updates.

Thanks, Navina. [Foreign Language], and good afternoon, everyone. Welcome to MISC quarter 1, 2023 performance briefing. I hope, I mean you had the chance to look at the announcement that we made to [ Busa ] on our financial performance. What we will do today is like what we have done in the past, it's just to give you a bit more insight on some of the numbers and some of the business environment that we see in the last quarter, as well as potentially in the next few months -- at the next month. In summary, overall, MISC delivered a strong set of financial results for the quarter compared to a year ago. Revenue, profit after tax and cash flow from operations are all showing a higher number. This strong performance align very much with the current market environment, where rates for shipping in the short term, remain high due to high demand that positively impacting the time [indiscernible] for these vessels. Continue making progress, we are as a group -- continue to make progress in the quarter to grow the business sustainably. Some of this opportunity will underpin MISC ambitious and commitment to pivot into a cleaner asset solutions provider. If you look at the slide here, you can see that our subsidiary, MHB working with partners to develop, I mean, large-scale electrolyzer facilities in Asia Pacific. And MISC is also working with partners on offshore oil and gas field decarbonization. And the latest, if you can see that the latest sustainability-linked financing that we did for our very large ethane carriers demonstrate MISC commitment to ESG agenda, please. In addition to that, I mean, in February, via our subsidiary, MHB, secured a new EPCI contract with PETRONAS Carigali and PTTEP International Joint Venture or operating companies to go by 5 wellhead platforms, subsea pipelines and all the [indiscernible] works. It just shows that in MHB is able to continue to grow its order book, and that will help them to continue to be to grow their financial performance going forward. We are also securing new customer in February that interested to deploy zero emission vessels the MOU with PETRONAS trading company was signed in February this year for 1 ammonia fuel Aframax tankers. These are some of the positive steps that will help us towards or to achieve our ambitions to -- for the 2030 and 2050 decarbonization targets. Next slide, please. And I would like to just briefly touch on Mero-3. I know this is one of the project of topics that we always have interest and we continue to show interest in the progress of the project. Mero-3, as I said quarter 3 has completed, it is about 85% in terms of physical completion at the yard. You can see the photo there, a lot of activities have taken place up to now. I think, all the listing campaigns has been completed. So now we are doing a lot of work in terms of timing to ensure the facilities is ready for the next phase. I think that's what I have with regards to the overall outlook, I mean this past --in terms of financial as well as business growth of quarter 1. Let's go into the more detailed presentation of the financial highlights. And then, detail on the business highlights where we can share with you a bit more insight on the individual businesses. Thanks.

Thank you, Encik Zahid. We will now see the presentation on financial performance by Cik Eslin, followed by market outlook by Mr. [indiscernible].

Thank you, Encik Zahid,for the introduction section. Good evening, everyone. Thank you to the participants for joining the MISC Berhad quarter 1, 2023 analyst briefing. As mentioned by Encik Zahid earlier, we are pleased to announce a positive quarter results, which I'll explain, as per the following. This is the key financial highlights. Revenue higher is compact the corresponding quarter, mainly due to revenue received from the Petroleum segment, mainly due to the higher freight rates. And as well as the higher revenue from the Heavy Engineering segment, mainly to revenue from ongoing Heavy Engineering projects as well as dry-docking services. As for the profit before tax from operations was also higher compared to corresponding quarter, mainly due to the higher freight rates that I mentioned earlier and higher profit before tax from operations from the offshore segment, where previously in the corresponding quarter, it was affected by the increase in construction costs arising from the global supply chain issue and lockdown in parts of China, which affect the movement of the project personnel as well as the materials and engineering activities. For the profit after tax, it improved in line with higher revenue and profit before tax from operations mentioned above. For the cash flow from operations, this quarter show a strong cash flow from operation, mainly from the high collections received from clients from the Petroleum segment in line with the improved operating performance, mentioned earlier. Moving on to Slide 9. This is our statement of financial position. As at quarter 1, 2023, where we have a solid balance sheet with prudent risk management. As you can see, the asset equity and liabilities as well as the gearing is more less, so what we had for the previous last financial year, minimal movements only. Our total assets, we closed at $14.2 billion. Our gearing ratio remains at 0.47x, supported by strong balance position which you can say, we are better or lower than the services for now. And for the debt composition as at March 2023, we have more fixed loans as compared to the floating which will lead to the better rate management in terms of the review of the interest rate hike that we have for now. That's for our statement of financial position. Moving on to Slide 10. Our cash balances remain healthy at $1.4 billion, despite a slight decline as compared to previous quarter due to the higher capital expenditure that we need to incur. There is minimal movement of debt balances in the current quarter. We wish to share for the earlier presentation that we secure our sustainable lead. Financing facilities for our VLEC vessels, which bodes well with our ESG agenda. Moving on to Slide 11. This is the financial performance by business segments. I'll go through one by one, I'll start-on with gas segment. Revenue and profit before tax was slightly lower as compared to corresponding quarter, mainly due to the vessel disposal as well as contract's [indiscernible]. We are also set into account the impairment charge in quarter 1 2033. For the Petroleum segment, higher revenue and profit before tax recorded as compared to the corresponding quarter mainly due to higher freight rates achieved in the third quarter for the VLCCs and MHB segments. However, the freight rates as compared to the preceding quarter was slightly lower has to decrease improved revenue and profit before tax that we can see in the presentation slide. Now we are looking at the offshore segment. Lower revenue as compared to the [indiscernible] corresponding segment mainly due to lower construction revenue based on project progress for each quarter. Lower profit before tax in corresponding quarter mainly due to the construction cost of FSO deriving from the global supply chain issue and not in part of China and the [ ISP ]. And lastly, for the Marine and Heavy Engineering segment, higher revenue as compared to proceeding and corresponding quarter, mainly due to higher revenue from ongoing projects, coupled with fiber docking and repair activities in the Marine segment. Profit before tax, we can see in line with the revenue, you mentioned above. However, this was offsetted against an absorbability as compared to the preceding quarters. That's all from me. Thank you. Pass to [indiscernible] for the business and [indiscernible].

Thank you, Eslin. On the market environment or LNG shipping segment profit rate, which is represented by the blue graph, continue to take in the first quarter of this year due to weak seasonal demand. The winter was mild, inventory level was as planned and vessel ability was high on both sides of the spreads on the first part of [indiscernible]. As for the 3 years time charter rates which is represented by the gray lines on the chart, it remains stable as charterers has preferred to lock in vessels for the short-term period. Having said that, both the spot and a 3-year's time charter are still higher compared to the corresponding quarter in [indiscernible] of quarter 1. Moving to the next slide, which is on the demand side. This year may be potentially a record year for LNG projects. 3 FIDs total 25 [ MTA ] has already taken place as at [ PETRONAS ] this year, and there's another 23 projects which is competing for FID in [ Delevingne ] and may lower to 2024. The positive outlook in FID will generate additional demand for LNG vessels. Qatar is expected to confirm 40 vessels orders under Phase 2 of its LNG order business. Moving on to the supply side on the next slide. Positive FID outlook and the EEXI and CII regulation has caused the search in new building orders with the order book to hit ratio currently standing at 49%. 8 LNG carriers were delivered as of quarter 1 and 41 is delivered for the remainder of the year. For the second half of the year, the speculative orders is expected to decline due to high new bid prices and years of recession. Coming to the next segment, which is on the petroleum shipping. Next slide. Similar to LNG shipping. Tanker rates has also [indiscernible] in quarter 1 due to weak seasonal demand. OPEC's latest announcement on production curbs has also impacted because they're likely to squeeze all supply in the near term. Having said that, the current rate is still relatively high compared to the past few years. The current rates are expected to be well supported by the new trade patterns arriving from the Ukraine-Russian war. Moving to the next slide, which is on the supply side. From a supply perspective, the order book that is at its lowest in history as it currently stands at 22.5% of the total fleet. This is generally due to higher asset prices and uncertainty over sustainable fuels to be used in the future. The record low order book will curb fleet growth over the next 2 years and will push utilization of the existing [indiscernible] As a result of the low order book 2024, we had the lowest deliveries in the quarter. As for the vessels ordered this year, it will only be joining the fleet earliest in 2025. Interestingly, on the demolition side has no scrapping as of today, due to high calculation. Offshore segment, the market element for offshore filters remain positive. Upstream CapEx is expected to grow by 12.5% this year. Half of the growth will be from Latin America and Asia Pacific. This signals potential huge demand for offshore closes, especially in Brazil and West Africa. 20 floaters is expected to be awarded this year. Out of the 20, 6 FPSOs are expected to come from Brazil and another 2 from Angola. Despite cost inflation and rising interest rate as the economics for those projects are still quite robust. That's quite a hand on the market environment for quarter 1. Over to you, Navina, for a Q&A session.

Thank you, [ Chi Eslin ] and [ Mr. Tian ]. We will begin the Q&A session shortly. [Operator Instructions]

We will now begin the Q&A session. Firstly, we have Ben Shane from Macquarie.

My first question is around the exceptionals. So you can see you've got impairments about 96. And I believe of that 47 is from intangibles. Could you give a bit more color to what's driving the impairments in this quarter?

Thank you for the question, Ben. We did impairment for our gas vessels in the first quarter, about USD 10 million, USD 12 million. Also, we also made an impairment in one of our start-up ventures, digital ventures. So that was the remaining 10 million or so that we impaired in the first quarter. That's what -- so this impairment of the start-up ventures is what you see in the intangible asset impairment.

Okay. So what was this digital venture doing in [ minus ].

There were 3 initiatives. One was in relation to emissions. The other one was in relation to safety. And then, the third one was in relation to the management of spares.

Okay. And should we expect more impairment on your gas assets in the second quarter? Because normally, you do your impairments of your gas assets in the second and fourth quarter. So is this all care for the second quarter?

I'm not sure whether you'll see it in the second quarter, but we expect there will still be some more in the remaining part of the year. So far, we've taken in about $10 million but if you look at the historical trajectory, last year was unusual because there was some adjustment given the impending environmental regulations that are coming up. But I think, if we follow the longer-term trajectory, there should be some of, but not as much as last year.

Okay. That's clear. My second question is around the one-off payment from PETRONAS gas on the FSU. So you're going to get a cash injection, if I understand at about USD 200 over million, correct?

That's right.

Okay. Does this change your CapEx sort of new project bid appetite for this year? Would you be able to go for more projects because you help your balance sheet. And is there anything specific that may -- maybe you can update maybe on your bid book, whether that complexion is changing given this cash injection is quite significant.

Maybe I'll answer the cash flow management part of it. I pass it to my colleagues to talk about the future pipeline. I mean, certainly, this would be good for our cash flow management because it will enable us to report a lower net debt over EBITDA for the whole year. I mean, this will be, I think it's not to reduce our debt at a time when interest rates are very much elevated or you can serve as the war chest for future growth activities. I will pass on to Zahid to comment on the second part of the question.

Maybe Ben, can you just repeat again the second part of the question, please?

Yes. So I'm not sure how much lead time you had on this cash, coming into the company. But does this change the way of looking at your bid book and sort of your CapEx pipeline for this year? Because I think the message to the market you gave at the start of the year was we're going to take it easy this year with adjusting Mero-3. We're not going to be so aggressive, right, with our new orders. So does this change that? Or is it -- should we still expect a more subtle or more muted and useful on new projects this year?

I think, Ben, thanks for the question. I think you can expect the same standard that we have -- we will take as what we mentioned in quarter 1. We are focusing on delivering all the projects that we have now, especially on Mero-3 and then on our subsidiary, MHB. So focusing on delivering the order book. However, I think we also mentioned that we will continue to assess opportunities that come in as long as the opportunity -- our strategic objective especially when we try to give an organization to a more sustainable and greener asset solutions. So it will be on case-by-case ban.

Okay. And just, if you can just sneak a follow-up on that. Any P&L -- that was the P&L impact of this one-off payment?

It is negligible because the -- is counted for as the finance receivable. So the transaction will be done more or less based on the book value. So there's been negligible impact on the P&L.

Okay. All right. Thank you. That's my two questions.

Thanks, Ben. Next up, we have Raymond.

Thanks, Ben, your accounting of two is very liberal. But yes, I'd like to call it an example. Okay. I just wanted to follow up on Ben's question about the FSU prepayments. So my question is why is the charter prepaying in?

I mean the charter has gone certainly some ForEx management reasons why because I mean the charter reports in Ringgit. Whereas the contract is in USD and in an environment of increasing exchange rate, there could be some adverse ForEx Yes. So I guess that's one of the reasons that they are doing this transaction. I mean, so far is our rationale, it helps us to quickly crystallize the project returns in a very short space of time. And certainly, this transaction was at a very relatively good project even.

Okay. Okay. Yes, that's good enough. So a couple of questions on the Mero-3. You mentioned that it's more or less on schedule. So, would you reiterate your guidance that the delivery will be in May next year? And also, I'd like to get a sense of whether you have something in your CapEx estimate and when that number actually is, if you could remind us?

Yes. I mean, in so far as the delivery date, all hands are on track to still meet whatever data we said, which we said is first half towards the end of the first half of 2024. So that one is still intact. And we have not made any further cost provisions or cost overruns or whatever for Mero-3, it is still the same CapEx estimate.

Okay. And in terms of the construction revenue run rate, the first quarter only saw about USD 100 million in construction revenue. Whereas in the fourth quarter, last year, immediately preceding fourth quarter was about USD 300 million. So should we expect $100 million to be the approximate quarterly run rate from now onwards?

No, no. I mean, it was slightly muted during the first quarter because of certain construction activities, coupled with also our contract management, we had to because we are dealing with some of the contractors and managing some of the contractual -- or contractual rights. So -- and the way that we do the accounts it is based on the input method which is based on cost recognized not. So we will deliberate in some of the payments that we not paying some of the creditors or the vendors because of some of the contract management that we're trying to manage in this period.

Was there an actual slowdown in the pace of the world? Or is it just that you're managing the payments of the contractors?

Yes. Partly the contract management and also relative to the fourth quarter, there was a slower progress on the ground.

I think, if you notice that we have a big lot of holiday in China in quarter 1 for the new year. So I think, those are the things that we have some of the impact on agreement.

Okay.

But I think if I can just add to that, I mean, what we have seen so far that the team with all the mitigation that they have put in place, a managed to close the gap on the delay on the original schedule. Is still -- we are still looking at the 6 months that we have advised you all a bit earlier. But the progress that has been is good to close the gap even further.

Is there any update on the guidance in terms of cost recovery from Petrobras or waiver of the LEDs?

No update, Raymond. I mean, the discussion is very much is in progress. So I think, it's a bit premature for us to give any guidance or update on the position.

Okay. So final question for me is on the construction profit for Mero-3 in the first quarter. Raja Azlan, could you give us the guidance on that, please?

Yes. I mean it's less than $20 million, is between $10 million to $20 million.

Okay. That's a big gap.

You are closer to 10 -- closer to as $10 million.

Okay. Okay. Sure. All right. Thank you.

Thank you, Raymond. Next up, we have Yan Jin from Maybank.

My first question is just a regular question. What's your term to spot ratios for your petroleum tanker?

I think for quarter 1, I think we're looking at 84 term and 16% post quarter.

Can we have the breakdown for your...

So VLCC, we're looking at 47-53 terms as the spot. To estimate is 86 and versus 14 for spot and Aframax is 96% versus 4% on quarter. And for the rest of the fleet that we have is all -- already on them.

Okay. Are you expecting to maintain this? Or will you comfort more to long term, especially in this year or the next few quarters?

I think in overall for the petroleum business, I think we are looking about I mean, 75% to 80% term. I think, it's where we are quite comfortable in our portfolio. But between the quarters, there will be some movement on that number [ INV ].

Okay. And the next question is on your JV. Can I know which unit contributed to the [ Jamin ] earnings.

This is our JV in Vietnam. There was a contract extension and that is the main contributor to the jump.

So can we expect the same level for the remaining of the year? Or it's just a seasonal?

Yes. That was one of initial.

Okay. So it won't -- it won't be the same level for the next quarters. Okay. Then, what kind of expectations can be -- or yes, what kind of earnings can we expect from your JVs? Is it going to be like I said, year-on-year or...

It should be [indiscernible] last year. Because last year, our Brazilian JV had incurred a lot of repairs, and that really brought down the numbers now. So if you strip that up, if you probably work out what would be the profit that recognize some JVs.

Okay. Is it going to be in the back of or it still be cost making. If you [indiscernible] that I will assume.

I mean, because that was a negative number last year, we should be [ flat ].

Okay. Okay. Got it. That's all from me for now.

Thank you, Yan Jin. Next up, we have Ho Meng.

Several questions. Just to follow up we -- maybe dealing with your order information, the JV associate line, right, can you explain or maybe explain the gain -- the this was strong in this quarter, any -- is there any one of items from us is that..

[indiscernible]

Yes.

It's about $10 million to $12 million in the first quarter. One of...

In U.S. dollar.

That's right.

For what project is that?

For the Vietnamese JV under the offshore business.

The -- it is ever be sensed and essentially deep?

An extension, you are right. Contract extension.

Okay. And related to that, right, I recall there was an incident in the Benchamas FSO. What is the update on this FSO. I think, if I hear [ cordon Abelt ] is going to be idle for a while. So can you confirm that? And how does that impact, I mean probably this particular FFO?

Yes. I mean this is a very unfortunate incident where during routine maintenance. See water entered into the engine room. And unfortunately resulted in some casualties there. However, there is no impact to the environment or sea line. I mean, works is under way to remove all the water out from the engine room, and we are currently cooperating with the charter as well as with the authorities in terms of coming to the conclusion on this incident. And yes, you're right, production has been temporarily suspended. And there will be some commercial impact, and we are in discussions with the charterer. But whatever it is, we do not expect the impact to be very material.

I see, we got outlook to double shell on this because if I'm not mistaken, TCT actually told our investors that this FSO will be idle for at least 9 to 12 months. So assuming this is true, this 9 to 12 months impact, right? Do you need to recognize the impairment for that? And on financial-wise, if you earn -- I don't know, do we still earn layup rates or something like that for this particular situation?

Yes. There could be some impact to the off-hire but as I said, it is not going to be material to our accounts. It's good to have no long, no operator and terminating impair.

Okay. Okay. Then just to quickly move on to my next question. The impairment for the -- guess that so right, the $10 million you mentioned earlier, how many vessels is that represented?

It's more 5 to 6 vessels.

5 to 6, okay. And for the -- and the prepayment for the regasifation of [ Fudan ], right, what is the ForEx rate that is locked in, when you concluded this prepayments?

No, the transaction is done in USD.

Yes. Yes. So how much ringgit is that essentially to -- if we...

No. They will settled in USD. So therefore, there's no impact to us because we are USD -- our constant currency is USD.

Okay. But on the P&L impact, there will be no -- there will be -- must be an impact, right, for a [indiscernible].

Negligible respect to the P&L because as I said, the transaction will be very close to the book value. And the book value is I mean, it's a big number because of the finance lease accounting where we discounted the low discount rate level.

Okay. And. To double shell Mero-3 again, right, if you talk about construction profit during the first quarter, how much is that again for the first quarter alone?

As I mentioned to Raymond, it's now -- it's between $10 million to $15 million.