MISC Berhad (MISC) Earnings Call Transcript & Summary

A very good evening, ladies and gentlemen. Thank you all joining our First Quarter Financial Year 2024 Analyst Briefing. I am Feisal from MISC's Investor Relations. We are honored to have with us today, Captain Rajalingam Subramaniam, President and Group CEO; Encik Raja Azlan Shah Raja Azwa, Vice President, Corporate Planning; Mr. Afendy Ali, Vice President, Group Finance; and Mohammad [indiscernible], Senior General Manager, Group Finance; and [indiscernible], General Manager, Corporate Planning. Before we begin the proceedings, I would like to invite Captain Rajalingam, President and Group CEO, to deliver a short opening remark. Captain, [indiscernible].

Thank you, and [indiscernible] to a very short one. Hello, everyone. Friends, colleagues hope everybody is well. Welcome to [Audio Gap] analyst briefing for our financial results, hope everybody is well. So without further ado, I pass it back to Feisal, and then we can have the major conduct of the day in terms of briefing and explaining questions that we have from our presenters.

Thank you, Captain. Before we proceed to the presentation, I would like to bring your attention to the disclaimer slide. This presentation contains some forward-looking statements in reference to our plans and expectations. That our actual results to defer to unknown risks, uncertainties and other factors that are in many cases beyond MISC's control. Now I'd like to invite Encik Raja Azlan for his remarks on the quarter's key highlights and business updates.

Thank you, Feisal. And a very good evening to our friends and colleagues from the analysts and the buy side community as well as our rating agencies. It's good to see you again. So I'll basically talk a bit about the highlights in the first quarter. Overall, we are very happy with our results in the first quarter. In terms of the financials, you can see the revenue has increased by 10% year-on-year. Our profits also have recorded about 15% year-on-year and were close to 20% quarter-on-quarter. In terms of our adjusted CFO, there is a slight dip due to timing differences primarily from MHB in terms of we received the recoveries in Q4 last year, but the spend or the repayment of the vendors, some was made in Q1. So if you adjust for that, we are looking at about 35% reduction in adjusted CFO Q-on-Q. And in terms of dividend payout, the dividend payout that you see here is in relation to the $0.12 that we declared in Q4 last year. In Q1, the Board has graciously declared a dividend of $0.08 per share and this is in line with our normal payout ratios. I think more importantly, I'd like to talk a bit about the strides that we are making in ESG. Firstly, in terms of emission reduction, we're very proud to say that we are progressing towards reduce the targets that we have set for us by 2030. As at the first quarter, our emission reduction is at 5.38, which is about 8% what we have reported in Q4 last year. So we are making a very good progress in that sense. In terms of pre rejuvenation also. We're very pleased to share that we have -- for the gas business unit, we have signed new long-term TCPs with QatarEnergy on the 31st of March for 3 new build LNG carriers and this lays the foundation to make further progress on our pre rejuvenation. AET also successfully delivered the third and final LNG dual-fuel VLCC, the Eagle Veracruz in January of this year to Shell tankers. So this is the third VLCC that began with Eagle Vellore in August of last year. In terms of ZEV, zero-emission vessels, we are very proud that we have, we announced on the 19th of April, that AET signed a TCP contract with PETCO Trading Labuan, we are the world's first 2 ammonia dual-fuel aframaxes and this is a very significant milestone in our journey to transition towards ZEVs. And then we're taking basically a first mover position and leading the way to help the company to achieve net zero by 2050 and before that 50% reduction by 2030. In terms of awards, I know we are very happy that AET was awarded the EuroMoney Islamic Finance Award in Dubai last week in relation to our USD 100 million sustainability-linked RC facility from Maybank Singapore. This is a significant recognition for the first of such kind of facility in the shipping industry in Southeast Asia, demonstrating both Maybank's and AET's commitment to the net zero journey. In terms of Mero 3, something that is very close to our hearts and is close to the hearts of our investors and shareholders. We are very proud that we achieved a major significant milestone. Firstly, the asset sailed away, the FPSO Marechal Duque de Caxias sailed away from Yantai yard to the Mero field in 24th of February of this year, and it has arrived at the field, and it has received the provisional acceptance on the 27th of May, just a couple of days ago. And the next step will be to proceed commissioning, which will take about 2 months or so with first oil schedule to be achieved by Q3 of this year. I'd also like to give recognition to our maritime academy, MMASB, which is the holding company or the ALAM academy, we signed MoU with Yayasan Sarawak and UT, University of Technology Sarawak on the 23rd of February, which aims to foster collaboration and sharing our expertise and resources and exchanging knowledge to produce and drive proposal partnerships to enhance the maritime education and industry development in volume in the wider region. Now a bit more about our segments. Firstly, in terms of the Gas segment, we are focusing on progressing our fleet rejuvenation strategy, as I mentioned just now. There will be other upcoming new builds, the 12 new builds coming out of our joint venture for QatarEnergy, where we have got 25% stake, this will be over the next -- from '25 to 2027. And also, we've got also another 2 vessels coming up for SRM, and all of these vessels will be equipped with the latest cutting-edge technology is designed to reduce emission. So that in total is about 19 vessels together with the QE contract that we just signed in the first quarter of this year. We are very bullish about the gas market. We believe that we have got another 2 cycles in terms of investment into LNG carriers. We believe that the gas market will peak between 2027 and 2040, and it will double, demand will double before it plateaus around 2024. And also, it is dependent on the pace of growth in renewables. The near-term prospects for the LNG shipping market remain positive, propelled primarily by Asian LNG demand and also increasing investments in LNG infrastructure. Moving on to the Petroleum unit. Crude tanker earnings remained strong in the first quarter. Average quarterly earnings for the 3 segments were north of 50,000 a day. And today, over 90% of our vessels are operating under term charters, which are very beneficial to provide secure income stream to the petroleum unit, and is also reflected in the results of the Petroleum unit. Moving forward, our capital expenditure will focus on dual-fuel assets, dual fuel LNG as well as dual fuel [ wooden ] tankers. The outlook for the year remains positive. We believe with favorable tanker supply demands and the segment will continue to identify opportunities, particularly in the dual-fuel sector to focus on building the long-term secured income. For the OPU sector, as I mentioned, just now, we are very proud with the achievements relating to Mero 3 or more the NIM is now being redeemed FPSO Marechal Duque de Caxias. The [indiscernible] of completion is 94.2% today. And we hope that we will be able to deliver the first oil Q3, as I mentioned just now. I mean this is the golden age of FPSOs. The demand for FPSOs are strong, and we expect that it will remain strong for the next 5 to 10 years. And therefore, there will be a lot of opportunities for the offshore business segment, especially having completed Mero 3 project. So far as MHB, it is on the path to recovery. In the first quarter of this year, you can see that -- it is now reporting profits. In the first quarter, we can see that revenue has increased substantially year-on-year, driven by strong performance both in the Heavy Engineering segments ongoing projects as well as increase in revenue from dry docking and repair services, and also in the Heavy Engineering segment, we have achieved a profit in the first quarter compared to an operating loss in the corresponding quarter. So that's -- and lastly, last but not least, [ AETs ] division. Last year, we incubated the division, but now it is beginning to show the fruits, especially with the contracts that we signed with PETCO for the zero-emission vessels and also the contracts that we have signed with PETRONAS CCS Ventures as well as Mitsui O.S.K. Limited to invest and develop the LCO2 carriers. So we are very bullish about the clean energy sector going forward. You are going to see that a significant amount of -- renewable fuels, clean fuels are required to affect the transition, and 50% of those fuels will require maritime solutions, so the opportunities for MISC as a maritime player will be abundant. So thank you. That is my opening. I'll pass back to Feisal.

Thank you, Encik Azlan. Next, without further ado, we'll have a presentation on financial performance by [indiscernible], followed by a market outlook by [indiscernible] please.

Thank you, Feisal. [Foreign Language] Very good evening, everyone. So I will be speaking about the financial performance of MISC for the quarter ends 31st March 2024. For revenue, our group revenue for the quarter is $771 million, 10% higher compared to the corresponding quarter, and this is very much contributed by our Heavy Engineering segment. However, this is offset by the lower revenue contribution from our offshore business, mainly coming from the lower construction revenue for Mero 3, and this is in line with the demand of the project, as mentioned by colleague Azlan. [indiscernible] the preceding quarter [indiscernible] Mero 3, our group revenue decreased by 15.7% across all business segments. This plan was [indiscernible] attributed by lower construction revenue for Mero 3 of offshore business as well as lower earning days from our gas asset and softer freight rates from our Petroleum & Product Shipping segment. Profit before tax from operations against quarter 1 2023, the group recorded 9.8% lower PBT of $148 million compared to $164 million. This is due to lower share of profit from joint ventures entities from [indiscernible] and share of one-off gain in contract and extension from our JVs in the corresponding quarter. Against quarter 4, 2023, we recorded a 4.5% decline in PBT from operations as a result of rates in the Petroleum & Product Shipping segment, which is expected because of the seasonal demand. New construction progress on Mero 3, as mentioned earlier. Profit after tax, we reported higher PAT by 15% compared to quarter 1, '23, and 19% against quarter 4, '23, again arising from the gain on exposure as well as which happened in this quarter and lower impairment provision in the previous quarters. Cash flow from operations for the quarter is lower by 36% against quarter 1, 2023 and 50% against quarter 4, 2023, very much due to the timing mismatch of distance on customers as well as payment to our vendors, especially in our Heavy Engineering segment. Next. In terms of our balance sheet, our group balance sheet as at 31st March '24 remained solid. Our total assets, equity and liabilities remains fairly unchanged as compared to December 2023. Our gross gearing ratio has not changed, and our net gearing ratio marginally higher by 0.01. Next. On cash and debt balances, our cash balance remains healthy at $1.6 billion, and against -- our cash balance remains healthy at $1.6 billion as of 31st March. When we compare against December '23, it's increased by 6.2%, we need the dividend payment that we made. Our debt balance remains positive. Performance by business segments. Our Gas segment recorded a lower revenue by 11.8% against preceding quarter and 4.7% against last quarter for the quarter '23, primarily due to lower earnings as I have mentioned earlier. The decline in revenue was cushioned by the gain on vessel disposal and lower impairment provision in the current quarter, resulting in higher PBT by 23%, 4% to 9% respectively. Our Petroleum segment remained fairly consistent, marginally lower revenue and PBT in current quarter as compared to the preceding quarter due to lower freight rates than with the seasonal shift. And on top of that, we achieved a gain on disposal in this current quarter. Our Offshore Business revenue and PBT declined due to lower construction progress primarily, as mentioned earlier, and lower incremental and one-off gain from contract assets in our JV companies. Our Heavy Engineering segment recorded 12.9% decline in revenue quarter-on-quarter due to incremental progress from -- incremental progress on ongoing Heavy Engineering project. The revenue increased by 85% against the comparative quarter, quarter 1, 2023 due to some projects were at the early stages last year, and EBIT remained constant, stable across all comparatives. That's all for me. Thank you.

Thank you, [indiscernible]. Next to Ms. [indiscernible].

Thank you, Feisal. A very good evening to analysts. I'll start off with the Shipping segment and the market outlook for the Shipping segment. Quarter 1, we saw the rates softened due to the lower demand -- seasonal demand as well as the inventory buildup in Europe as well as Northeast Asia. However, the market remains positive. Spot rates are expected to improve, despite ample vessel availability in the market. And our gas unit will [indiscernible] portfolio of long-term charters. So the LNG segment is expected to improve -- going to the next quarter. In terms of FIDs, we are looking at 2024 [indiscernible] year in terms of planned LNG projects. The -- some of the projects in the U.S., as you know, has been challenged due to the temporary pause in terms of licensing LNG projects by the government. What we see is that under construction projects, for example, they just said it to continue will come online by 2028 and they will -- though, they will not be remain -- we will not be affected in that sense. With the U.S. taking a step back, other LNG projects or other LNG players in the Middle East, for example, and Asia will ramp up the game and expand their footprint in the market, and this you see the QatarEnergy for example. With regards to new [indiscernible], the LNG had the LNG order book at the moment, standing at by 53% relative to the current fleet, which is about 364 vessels and majority of them are LNGCs. And this is an increase compared to last year's 2023. Among the new orders, majority are from QatarEnergy based on the mega LNG expansion plans of Phase 2. Despite that, the tight shipyard conditions like [indiscernible] 2028, and the earlier soft usually bring at a high premium. Having said that, the labor shorten [indiscernible] in South Korean yard that we see it will also have an impact several delays in delivery of the new builds, as well as the sanctions that we put forward on to Russian ship owners as well as shipyards. That could be delayed due to external factors. On the Petroleum Shipping side, we see that the market is -- market is positive overall, and it is feasible due to its tanker supply-demand. The market rates have been meaningful. And despite the increase in tonne-mile demand and also by the growing long-haul Atlantic exports, the focus for us probably will be on the long-term secured income to generate business growth. In terms of fleet growth, the crude tanker owners will fully enjoy attractive earnings [indiscernible] due to the [indiscernible] supply as well as the healthy demand. And that will keep the utilization percentage strong, and the rates will remain high. However, the weakness in the fleet growth, for example, will support as well the tonnage utilization and perhaps capping the most loss of the decline in base. The order book to fleet ratio, as you can see, [indiscernible] 6.9% and the total vessels on order book stood about 154 vessels and most of the [indiscernible] reflects. Moving on, in terms of the demolition, you can see that in 2024, the durables and demolitions will be low. And also, however, this will lead to the expansion overall in the sea. And the current situation in the Red Sea, for example, is unlikely to improve and the tonne-mile will continue to expand and hence, the supply to the fleet that will boost the vessel utilization further. Having said that, the lack of replacement in terms of tonnage also would slow down the demolition rate over the next 2 years, and this will probably be revive in 2026, as you can see from the chart. And for the Offshore side, offshore CapEx, we can see a very strong growth -- a trend, a strong trend and is projected to continue, I mean, years with a total upstream offshore CapEx estimated to reach about $270 billion by the end of 2028. We'll be looking at uptick around 6.5% to up [indiscernible] 2028. And there is, therefore, a new renewed appetite for exploration. Asia Pac and Latin America will drive the growth of 51% of the E&P growth on spending as well. Moving on to my last slide. What we can see is that there's probably be about 8 FPSOs to be awarded this year and most of them are from Brazil, perhaps 2 from South -- through other parts of South America. There has been a significant growth in the FPSO awards in the past years. And this is probably because costs, reevaluation and adjustments renew reality of financing. So with that, I end my [indiscernible] and give [indiscernible].

Thank you, Ms. [indiscernible] for your presentation. We will begin Q&A session shortly.

[Operator Instructions] The first question is from Ben Shane.

Well done on a good set of results. My first question is just a simple one. What would your normalized cash flow would look like, if not for the lumpy vendor payments? My second question is, have you made any headway in lining up a partner to monetize Mero 3? And how does that affect your appetite or capacity to take on new projects. You did mention you are quite eager on the LNG pipeline. Just wondering how does that swing your decision on how many projects you can afford to win almost.

[indiscernible] about the adjusted cash flow. First, the answer to the first question Ben is about USD 270, if you were to adjust for the anomaly coming up from MHB. The adjusted -- or the normalized cash flow will be about 270 for the first quarter. Then your second question about the progress that we're making on the Mero 3, right, that's your question, right? Yes, we are in discussions with a couple of 1 or 2 parties, and it's currently in the process, because of the size of the transaction, it takes a bit of time. Then on the third question, can you repeat it again, please, Ben.

How much does this affect your ability to go and bid for projects, you have some balance sheet constraints if you're not able to monetize Mero 3?

I mean if you look at the past couple of years, we have been spending about $1 billion to $1.3 billion of CapEx per year. That would probably be the amount of CapEx that we can spend on, right? And -- if you want to spend more, we certainly need to monetize some of our assets. And we are -- currently we're looking at -- we're working on the Mero 3 asset in terms of monetization.

Okay. Sorry, can I just clarify your first answer. 270, 2, 7, 0, is that right?

Yes, that's right.

Why is it still quite low compared to your previous quarters?

I mean, again, MHB was not able to build the clients during the first quarter because of -- we had not reached the percentage of completion required for the next billing is really -- the explanation is really coming from MHB, and you will remember that last year, the cash flow was unusually high because we had a one-off FPSO prepayment.

Next, we have a question from Muhammad Nuur Ashman from AmInvestment.

Firstly, congratulations on the good set of results. Just a few quick housekeeping questions for me. Could you reiterate back what was the term to spot ratio for the quarter?

92% term for Petroleum ,yes. 92% term [indiscernible] up.

Is that similar across the board for the other segments or only for the Petroleum segment?

That is for the Petroleum segment. In terms of the Gas segment is probably about 80% [indiscernible].

All right. Secondly is with regards to the construction progress for Mero 3, despite having you say only, construction progress is at 94%, as you said. Is that construction progress or accounting progress? Or how do we look at that? You will only recognize the final 6% upon first all or how will it work.

Yes, that is accounting progress.

I see. So the final 6% will only be recognized upon the first oil, yes?

And also the -- [indiscernible] can I get my finance colleague to answer that one.

Basically, from an accounting standpoint, we'll need to resolve all the -- more items with our client before we get to be able to recognize the final milestone, yes. So then -- only then we'll be able to achieve the 100% of the construction progress.

I see. But the financing [indiscernible] 1 final milestone, right?

[indiscernible] of accounting milestones, up to frist quarter. So it progresses towards the first quarter. That has already arrived in Brazilian waters and going towards that. So now is that the carbon commissioning it. So that's where we [indiscernible] gets 100% as my colleagues have happily mentioned just now.

Next, we have a question from [indiscernible] from CGS.

The question I have is on the Mero 3 financing. I believe that currently, the Mero 3 CapEx is completely funded by internal capital from MISC Berhad, and one of the ways you can raise cash is to either do project financing or project bond. I believe that you have spoken about this previously. Could I just get an update on what's happening here?

I mean, the current market is on the high side. And if we were to lock in the current rates, we will have to pay a very high rates, right? So currently, the strategy is to work on the divestment based at least on the [indiscernible]. And later on, do the project financing or the project bond where the market is more conducive.

I see. I see. Okay. So if you do sell down your stake. Will you sell it down below 50%?

That's -- I mean, actually, that is the goal. The goal is to deconsolidate the asset, and we are working towards that.

Okay. Can I know what kind of EPCC revenues and profits were recognized for Mero 3 in the first [indiscernible].

[indiscernible], can you repeat your question, please? We don't hear you clearly.

Yes. May I know what the EPCC revenue and profit recognition in the first quarter was for the Mero 3?

I think for Mero 3, the quarter 1 profit is [indiscernible].

Maybe, we will come back to you [indiscernible] on that question. Maybe you want to proceed to [indiscernible].

Yes, in terms of the sale of the LNG tanker and the petroleum tanker, may I know which -- what is the identity of those vessels, please?

The energy was the 2 mid-size tankers. They are quite old mid-size tankers.