23 September 2011

MISC poised to weather the storm:

KUALA LUMPUR: MISC Bhd seems to be back in choppy waters again amidst the capacity glut in the shipping sector that has weighed down on freight rates.

Its chairman Datuk George Ratilal said the industry outlook would remain negative in the next two years and shipping rates would stay down. The recovery would only happen in two years, he added.

Ratilal said the challenging environment would hit MISC’s earnings badly. The sharp drop in the group’s first quarter (1Q) results could be an indicator on MISC’s earnings prospects going forward.

MISC’s net profit plunged 59% to RM187.8 million for 1Q ended June 30, from RM461 million in the previous corresponding quarter.

The fall in profit was mainly due to losses in petroleum business from the low freight rates and higher losses in liner business from lower liftings. But, Ratilal was quick to emphasise that MISC is not solely a shipping group.

MISC president and CEO Datuk Nasarudin Md Idris said MISC would be able to weather the storm its other divisions, such as liquefied natural gas (LNG) tankers keeping it buoyant.

“Our LNG shipping has 29 vessels with long-term charter agreements with Petronas (Petroliam Nasional Bhd) at steady rates. Heavy engineering and marine services is not as stable but with good E&P (exploration and production) and good visibility,” Nasarudin said.

Its 66.5%-owned unit Malaysia Marine and Heavy Engineering Bhd, which was listed in October 2010, has an order book of RM3.1 billion that will last until 2013.

The group’s president of corporate planning and development Yee Yang Chien said the shipping rates would not possibly get worse from the current level.

Shipping rate were as high as US$200,000 (RM630,000) per day at their peak in early 2008, but are barely about US$1,000 a day currently. According to Yee, ship operators are running at a loss operating at the rate of US$1,000 per day. “Operating costs, hiring crew and fuel alone will cost more than US$8,000. Most owners prefer to lay by their ships rather than lose money running them,” he added.

The vessel supply imbalance softened slightly in 2010 due to record levels of scrapping as many of the older vessels reached the end of their life but scrapping in 2011 has fallen, said Yee.

MISC owns 50 petroleum tankers that make up almost 40% of its entire fleet and the group expects 11 newbuildings to be delivered by next year, plus 3 units the following year. The newbuildings are mainly petroleum tankers.

Despite the current economic uncertainties, Nasarudin said the group would not defer deliveries of its vessels.

Moody’s downgraded MISC’s credit rating on Tuesday in view of the gloomy industry prospects.

Ratilal said the downgrade did not come as a surprise but noted that MISC had strong support from its major shareholder Petronas. “We’re in a much better position compared to other players,” he said, referring to the profitable LNG shipping arm of MISC.

MISC has allocated RM4 billion to RM5 billion for capital expenditure (capex) over the next 2 to 3 years.

Ratilal indicated that given the bleak industry outlook and the current relatively high asset prices, acquisition of distressed assets was unlikely at this point in time.

“Ship owners have thus far proven that they have holding power but cracks have already begun to show and if conditions persist, opportunities may arise and we will explore them,” said Ratilal, citing MISC’s acquisition of American Eagle Tankers Ltd from Singapore’s Neptune Orient Lines in 2003.

Asked if MISC would sell off underperforming assets, Ratilal said if conditions persist the group would  take a hard look at its portfolio. “Getting out of a business is a major decision. It is very hard to get back in and rebuild later.”

Ratilal said: “We will not shy away from taking hard decisions that protect the value of the company.

“What we will try to do is to manage loss without sacrificing safety or reliability.”

Source: The Edge Financial Daily. By Ben Shane Lim. 23 September 2011

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