MISC Berhad (MISC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for participating in our Second Quarter Financial Year 2023 Analyst Meeting. I am [ Faizen ], MISC's -- from MISC's Investor Relations team. We are pleased to have with us today Captain Rajalingam Subramaniam, President and Group CEO of MISC Berhad; Raja Azlan Shah Raja Azwa, Vice President, Finance and Interim Vice President of Corporate Claiming; Eslin, Head of Financial Reporting, Governance and Budget, from finance; [indiscernible], General Manager, Corporate Claiming. Before we start with the analyst briefing proceeding. I'm pleased to invite Rajalingam, President and Group CEO of MISC, he'll provide a short opening remarks. Captain Raja?

Thank you, [ Faizen ]. Very good evening, everyone, analysts. I'm advised that this was 12 of us, what you call -- dialing in into this Q2 financial results Analyst Briefing. I'm happy to welcome, everyone. Some of you have asked that I participate in the quarterly Analyst Briefing as well when we met up earlier this year. So here I am and happy to take you all through on the Quarter 2 financial results. And I will come back to clarify any clarification that you require post the briefing. Over to you.

Thank you, Captain Rajalingam. Before we proceed with the presentation, I would like to bring your attention on the disclaimer slide. The presentation contains some forward-looking statements with reference to our plans and expectations whereby actual results to 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 Mr. Raja Azlan for his introductory remarks on the quarter's key highlights and recent updates. Mr. Raja Azlan?

Very good evening to my dear friends, from both, the buy side and the sell side. It is with great pleasure that we are here to announce the second quarter results in 2023. I'll just give you the highlights before I pass on to my colleague, Eslin, to take us through the details. Basically, in terms of revenue, we reported revenue of about $785 million, which was 12% quarter-on-quarter. Year-on-year, it increased by about 6%. In terms of profit after tax, there was a decrease of 50% quarter-on-quarter. Although for the first half of the year, we recorded profit about $290 million which is more than 100% increase year-on-year. In terms of cash flow from operations, we reported for the quarter, $562 million, which is a 66% increase quarter-on-quarter. And if you look at the first half of the year, we recorded personal operations of about $900 million, which is more than 100% increase year-on-year. We'd also like to highlight that MISC received the Silver Award, The Star ESG Positive Impact Awards under The Large Companies Tier for the Environmental Category: Sustainable Ecosystems. This recognition reflects our commitment towards caring for oceans' health through MISC's Heart of The Ocean Marine Biodiversity Restoration programme. In July as well, AET and Eaglestar were recognized with the Chamber of Shipping of America awards, the [ NOCP ] awards. The collective efforts of two entities have set a good safety records without any long time -- lost time injuries for 48 vessels and have recorded a total of [ 328 ] [indiscernible]. We move to the next slide. We'd also like to share some multiple updates during the second quarter. On the 2nd of May, MISC unveils future ready Newbuild FPSO known as Mega-Module, engineering and grid architecture, the world's first NBFPSO that uses the Mega-Module top side in a corporate sustainable [indiscernible] with the potential to reduce carbon downside emissions by nearly 40%. The design was 24 months in the making and demonstrates our continued commitment to developing innovative solutions. In June of this year, MISC through its entities AET as well as the Malaysian Maritime Academy, Inc. a master of collaboration agreement with WinGD and DNV respectively, to develop future in American talent and next-generation ammonia engine. And this will drive the development of ammonia engines for ammonia dual fuel vessels. We signed agreement between AET and WinGD further intensifies our group's statement to decarbonization and a step in the right direction towards our long-term ambition plan. Subsequently, in July of this year, MHB signed a MOU with Uzma Berhad to develop innovative solutions, exploring opportunities within the renewal of energy solutions value chain and also to provide comprehensive services to meet the increasing demand on the oil and gas industry. So that's basically some of the highlights for the second quarter of this year. I'll pass over to Eslin to take us through some details on the results for the second quarter. Sorry, before that, let's just go to the next slide. We also are happy to share, we made healthy progress on our MERO project, which is currently in the [indiscernible], where the project has achieved overall completion of close to 90% as at the end of the second quarter. And we had the successful execution of the topside modules, the Lifting Campaign, the same completion of the initial Marine Gas Oil or our bunkering operation. And also we accomplished the completion of the marine cable pulling activities. So as of the end of the second quarter in terms of -- on the ground, the construction completion program is about 93%. The overall completion is about 89%. Thank you. Over to you, Eslin.

Good evening, everyone. Thank you to Captain Raja and to Azlan Azwa for the introduction section. Thank you to the participant for joining MISC Berhad's quarter 2, 2023 Analyst meeting. I'll bring you guys to the pitch deck of our [ AB PAT. ] First, I'm going to talk about our revenue. Higher revenue for the year-on-year mainly due to the higher revenue received from Heavy Engineering projects, an offset with lower revenue from offshore business with lower revenue recognition from past conversion following total project progress in the current quarter. For the profit before tax from operations, higher profit before tax from operations affect the year-on-year, mainly due to the margins on freight rates in the Petroleum segment as positive contribution from offshore segment as previous corresponding quarter was affected by the inflation construction cost of [indiscernible] arising from the global supply chain issues and lockdown in part of China. Whereas lower profit product from operations for the Q-on-Q position, mainly due to the additional cost provision at the time for an ongoing Heavy Engineering project in the segment. Profit after tax movement as compared to year-on-year and Q-o-Q are in line with the revenue activity mentioned above as well as result from the lower in time of provisions that we had in the current quarter. Cash flow from operations improved in the current quarter, mainly coming from the higher operating performance in [indiscernible] and the receipt of the [indiscernible] payment for the two big storage units. Moving on to Page 9. Our balance sheet is very solid with a prudent risk management. The overall group total effect, total equity and total liabilities show marginal movements at the end of the last financial year with FX of above $14.1 billion. Our gearing ratio remains low at 0.45x, supported by strong balance sheet position. The impact on interest rate hike is very muted, given the current debt risk composition that MRT group have at this [ juncture ]. Moving on to Page 10. The cash and debt balances. Our cash balances remain high at $1.6 billion as of this quarter, lower cash balance compared to the previous corresponding period is due to the $1 billion bond issuance that we had in previous quarter. While we are serving the debt obligations as we go along, there are some CapEx payments in the current quarter and partly offsetting of the payments from the client. At this juncture, our debt balance is around $3.9 billion [indiscernible], lower drawdown in the current quarter. On Page 11, it is the financial performance by business segment. I'll start now with the gas segments, revenue was comparable between year-on-year -- on quarter-on-quarter position. Profit before tax was better than previous -- first [indiscernible] as a result of lower vessels [indiscernible]. There are also impairments like this in this quarter as the impairment assessment was planned at an interval of point in time. We would like also to emphasize that this is purely in the [indiscernible] treatment as of the assets close to the [indiscernible], whereby we see [indiscernible] investor during the contracted period. For the Petroleum segment, overall revenue and profit prospect was higher as compared to the 2 quarters, mainly high in the current quarter. For the offshore segment, lower revenue is compared to the corresponding quarter as well as preceding quarter, mainly due to the lower [ compressor ] revenue based on the project progress that I mentioned earlier. High PBT as compared to the previous quarter, reconstruction costs that we captured due to the global supply chain issue and lockdown impacts from China. And finally, the marine and heavy engineering segments, higher revenue as compared to the previous corresponding quarter and pending quarter mainly due to the higher revenue from an ongoing [indiscernible]. Loss before tax in the current quarter still with the engineering cost provisions as a result of [ first ] scheduled for on-going projects during the quarter. With that, thank you. Then I'll pass to Ms. [ Kieran ] to present on the market environment.

Thank you very much, Eslin. So good evening to the analysts. I shall take you through the market environment that we are in today. Starting off with the LNG Shipping segment. Spot rates have increased slightly in June following the increase in chartering activities, mainly in the Atlantic basin. There were production setbacks in the U.S. and other locations in May. And on top of that, we see that there will be a rebounding of energy demand due to the restocking of winter requirements as well as depletion of inventories in the summer, given the frequent heat rate that we've heard about. So [indiscernible] on this, the gas segment will continue to pursue available growth opportunities, while our operating income continues to remain solid, [indiscernible] our current portfolio of long-term [indiscernible]. Next slide, please. On the global liquefaction capacity, we expected to increase five project to be sanctioned this year. As you can see from above, there's many projects that are hundred global projects or pre-FID stated for [indiscernible]. Next slide. With the increase in the planned manufacturing project as well as reach FID, as I mentioned, is now newbuilding orders have accelerated despite tight yard capacity and [indiscernible]. So as of today, the orderbook, we have 320 LNG in the global orderbook. On top of that, we also expect a surge in new ordering and to expand from orderbook to fleet ratio over 51%. And there will be a push of fleet renewal statements, especially for steam turbine ships, following the IMO requirements. Moving on to Petroleum shipping. Overall, the average rates remain slightly lower [indiscernible] in line with the normal seasonality. Looking ahead, we expect another period of strong tanker rates developed during the winter months, with continued strength for the next 2 to 3 years due to the very positive [indiscernible] fundamentals. And in terms of the petroleum shipping orderbook, there were very few orders [indiscernible] new orders. So the orderbook for tankers have been restrained by the higher asset prices as well as the uncertainty over sustainable fuels to fuel the future that has actually curb the [indiscernible] and hence, we have a tight tonnage. In terms of the order book, it is mainly dominated by the Suezmaxes, followed by Aframaxes. And most of these are LNG fuel masses. Moving on to the deliveries. We see that due to the low orderbook and the less scrapping activities, this has actually brought about a tight tonnage supply and therefore, fuel deliveries expected to lead to tighter yard [ availability ]. On the Offshore segment, we see that the growth -- the fleet growth on upstream spending a long tonnage increase in energy demand and projects to the oil and gas sector in 2024, a spending of 163 billion and expected to go up to 213 billion in 2027. The growth is mostly coming from the Latin American region as well as the Asia-Pac region which includes most of the Asia. So in terms of a wall of potential projects, [indiscernible] come from, again, South America as well as West Africa. And so quarter [indiscernible], there were 35 FPSO order, and there are about 26 projects to be awards next [indiscernible]. So while inflation and rising rates have decreased development costs, the economics of most of these projects are still quite robust and should see to [indiscernible]. With that, that's the end of my market segment update.

[Operator Instructions] Firstly, we have Mr. Ben Shane from Macquarie.

I appreciate Captain being on this call. My first question is regarding the Heavy Engineering segment. Could you give a number on how much of the one-off provision that was?

We booked the loss that you can see from the results, the two projects there. I mean, we will share you exactly what the provisions are. But I mean, from the loss that were reported, you can see on what would the provision look.

So it's about 300 million to 400 million?

I think what was reported in the segment was 25 million.

Yes. Okay. All right. I would just assume that. Next up, I saw that your dividend took a bit of a step up. I just want to understand, is it just a one-off side to that one-off prepayment on the LNG side? Or can we expect your quarterly dividend to hold at this level?

I mean as far as dividend -- firstly, on the heavy engineering, yes? The heavy engineering provision is for the life project. It does not mean that it has been expense [indiscernible]. So that the provisions that we are looking in primarily for the project, which [indiscernible]. We new need to get that here. The second one is that in terms of dividend, we've always said that we want to maximize what was the value, right? Some of the analysts that we have met -- the investors that we have met, the request has been done. So in this quarter, and as Eslin mentioned just now, our balance sheet is strong. Our financial position is strong. Yes, we have allocation of capital for future growth, and we find that we are able to do this sort of a dividend at $0.10 per share. In terms of future quarters, of course, we will do our best in terms of maintaining previous quarterly dividends or improving it. And then we just have to assess the bandwidth as we move along.

And I just want to be very clear, because you have a pretty -- a very nice dividend payout profile, normally sustained about $0.07, right? So should we expect at least $0.10 going forward? Is that a message?

Ben, you're asking me to make [indiscernible] read between the lines, right? We have a good cash position, and we always try to maximize shareholder value.

Next, Mr. Raymond Yap from CGS-CIMB Securities.

A big thank you to Captain Raja for finally coming on. So we really appreciate you coming on here. Okay. So back to the dividend question, I heard the word, improve, Captain Raja. So I shall take it that you are hinting that the dividends will be stronger going forward, yes? Okay. Maybe I'll just leave it there. I just wanted to talk a little bit about what Raja has mentioned just now about the completion rate for the MERO 3. You mentioned 93% and 89%. Captain -- sorry, Raja Azlan, could you just elaborate a little bit about the difference between these two completion rates?

Yes. So the 93% is relating to the construction component. If you look at it, the project [indiscernible] components, you got [indiscernible] component, the engineering component, construction component, and then lastly, the book up commissioning component. So for the construction component, we reported 93%. But overall, in terms of overall progress is 89%.

Okay. So in the previous quarter, you mentioned that it was 85% complete as at 31st of March. Is that on an overall basis, that 85%?

Yes, I believe so.

Okay. So then at 31st December, it was 75%. And then 31st March, it was 85% and then now 89%. So there seems to be a bit of a slowdown in the progress. Am I right to say that? Or is it just natural for it to slow down as the project is completed?

Yes, you're right. I mean, basically, in the last year, overall, there was about 40% programs. This year, overall, you're going to see overall progress of 20% as we reach the [indiscernible].

Okay. So it's natural for the percentage of completion progress to actually slow down?

Yes. I mean there's no need for any alarm, because we are on track, based on the reach [indiscernible].

Okay. Is there any change in your guidance that the FPSO will be completed by May or June this year?

It remains as we have initially -- as we have mentioned before. There's no change to that.

Okay. And just to drill down a little bit, when you say that completion in May or June, do you mean that the sailaway is in May, or June or the sailaway is a bit later than that?

The sailaway is slightly earlier. The sailaway will be in the first quarter, and then it will reach the site in the second quarter.

I see, I see. Okay. Sure. One more question before I...

[indiscernible] When we talk about construction, we talk of overall progress, right? Construction has shot up and then as per the rebase line [indiscernible]. So as we start doing the completion, it will be between now and this is a [indiscernible], yes, as far as the yard, between now and the sailaway. The sailaway, we expect sometime in [indiscernible], yes? And then to be on site in Brazil for the [indiscernible] by the tailend of the quarter 2. May, June, that's sort of the period. So then it does on-site to be [indiscernible]. And I've visited the asset recently, and I'm quite pleased with the progress overall. And client that also visited the TSF [indiscernible] and appreciates the schedule catch up, plus also the quality of the TSF. So this is the latest component price. So you should not be alarmed in terms of the bunchiness of progress you have seen [indiscernible].

Okay. So maybe just one final question before I go back to the queue, Captain, could you talk a little bit about the reports in upstream, talking about you being interested to bid for further projects in Brazil. You mentioned previously that you will only start bidding only after you complete the MERO 3, have you sort of accelerated that?

I mean as far as prospects event, we do have to evaluate prospects. And if you take what I've mentioned previously, in terms of the construction of any new assets that we will be -- there's a prospecting phase, bidding phase, and there's also a construction of any new asset that we decide to bid and more [ brand ] FID. So the guidance is always there. In terms of the construction phase of any sort of assets that we are going to do, we'll only be after successfully delivering the MERO 3 to our clients, including the acceptance stage. So we still hold firm to do that. So whatever market news that you hear, it looks at the prospecting, potential bidding, et cetera, this market [indiscernible]. We still hold firm as far as construction is concerned of any new offshore assets that we are taking to the size of that rigor real projects is only after our cash flow starts coming in for our existing projects.

[Operator Instructions] Next, we have Mr. Steven Chan from Affin Hwang.

So I'll limit myself to just two very short questions. Number one, what is your current term to spot ratio for your Petroleum tanker segment?

Highlighted that for this quarter, we are at 88%. [indiscernible]

Your spot vessels are mainly which [indiscernible]?

The spot [indiscernible] will be a mixture of -- small mixture of [indiscernible] and our Aframax.

So mainly is from Aframax?

Yes. Suezmax portfolio, Suezmax is actually quite small. It's mainly Aframax and then small portfolio of Suezmax.

All right. My second question is in regards to your cash flow. So in your slides, you see adjusted cash flow -- operating cash flow is about $560 million. Just have a rough sense of how much of your operating cash flow comes from the LNG segment?

Roughly about 40%.

40%. What about the contribution from other segments?

Then we have got [indiscernible] 30% to 40%, and then offshore about 20%.

Next, we have Mr. Kong Ho Meng from UOB Kay Hian.

Just to double check, the nonrecurring items for the quarter. Can I know -- okay, basically, can I know what was the -- in your P&L on the finance lease gain on the FPSO MERO 3 in second quarter alone, they recognize in a [indiscernible] or not. And also, the JV and associate income was almost pretty good. Are there any one-off items there?

Yes. I mean, as usual, it's not much the quarter give $10 million to $20 million of construction profit recognition.

Okay. $30 million?

No, between $10 million to $20 million.

And under the share of [indiscernible] of joint venture and associates, is that a normal amount? Or was there any one-off items?

The share profit is very minimal. You're talking about the year-to-date, yes?

In the quarter itself is almost pretty even.

Yes. So the year-to-date when there was one-off gains from our Vietnamese JV was for [ extension ] gain.

Okay. Okay. And my second question is to check on your CapEx plan, right? So you -- the number of vessels you have is still roughly the same. Vessel prices for new business still is high. But I just want to know at which point in time that you will -- I mean as and when you rejuvenate your fleet, right, when will you be ready to invest again in new -- of course, new vessels, but new vessels for growth. Are you ready for prices to go down a bit or -- but the thing is the yes are already full right now all the way to -- for the next few years.

So let me take it in this way. In some of the previous first discussions that we have had and we also review of our commercial strategy of our [indiscernible]. We have done a review of the commercial strategy of our existing assets, especially our asset -- our LNG assets. And we find that there is components to take in terms of extending the life of our assets, which is creating that 20 years of age plus there is a life and [indiscernible] for these assets. So that is more or less getting the assets in the right manner. We think we gain the cash flow on existing assets. Then in terms of our FIDs -- potential FIDs, we're very careful in the FIDs, all for the right reasons that you have mentioned is now in terms of asset pricing as well our [indiscernible] 2030 and 2050 decarbonization agenda, decarbonization and [ LDH ] agenda. And we do not [indiscernible] over this, very focused. So we evaluate the assets that we want to go for. We want to ensure that the ambitions of the assets are amongst the best, use technology, which will support decarbonization. And also at the right asset prices, right? So there are a couple of tenders currently in terms of where the client denominated tenders, have got some sweet spot prices for the asset. So we are evaluating participating standards both, for our gas and our petroleum assets. But at the same time, we're also very careful in terms of our gearing, in terms of our [indiscernible] growth. And being very careful in the choices that we make. So it is a combination of getting our existing assets, because there's [indiscernible] and there's a commercial value for those assets. And at the same time, the bank meeting in terms of the new FIDs that we want to do, because we still want to do the FIDs not on a speculative basis, we want to do the FIDs based on cover for those investment decisions. So as we speak, there are a couple that we are evaluating. But we'll be very careful in those choices to ensure the right quality of income, the right quality of the asset. Our partnership is very, very good with the client on [indiscernible], including our [ platinum ] clients, including PETRONAS Group as a client. And this is our focused approach, which the [indiscernible] across shipping assets.