MISC eyes small shipping firms

MISC Bhd, the largest shipping company in Malaysia, may take advantage of the current downcycle in the industry to acquire smaller units or subsidiaries of “troubled” shipping companies at lower prices.

An AmResearch analyst told StarBiz that MISC would be doing relatively well if a small acquisition took place despite the gloomy environment that had affected trade, the lifeline of the sector.

“MISC has stable revenue from its liquefied natural gas (LNG) tankers business with 70% to 80% of the vessels on long-term contracts where the earliest will expire only in 2013,” he said, adding that the global downturn had an insignificant impact on these secured contracts.

MISC is the world’s largest single owner-operator of LNG tankers with a fleet of 27, which is expected to expand to 29 this year.

MISC’s offshore business and huge order book from its heavy engineering division via subsidiary Malaysia Marine and Heavy Engineering Sdn Bhd (MMHE) will keep the group busy for the next 12 to 30 months.

According to a recent report by the research house, these three divisions now collectively account for 100% of the company’s pre-tax profit.

Also, the analyst said, MISC had secured a credit line of about US$1bil last year to part-finance its fleet growth and other purposes.

MISC’s underperforming businesses are in the container shipping and chemical tanker divisions.

The report said MISC would likely take over a unit of a financially-troubled shipping company similar to the American Eagle Tankers (AET) acquisition in 2003.

MISC bought AET at a 10% discount when Neptune Orient Lines Ltd auctioned it due to its high debt level and loss-making operation.

AET, now a wholly-owned subsidiary of MISC, was purchased at an equity consideration of US$445mil, or US$1.1bil inclusive of net debt.

“Although MISC’s gearing immediately rose to 66% post-purchase of AET, natural de-leveraging from healthy free cash flow brought the gearing down to 17% in 2006,” said the report.

MISC’s net gearing for the financial year ended March 31 (FY09) is forecast to stand at 0.3 times while international peers in its league, such as General Maritime Corp, Aries Maritime Transport Ltd and Taiheiyo Kaiun Co Ltd, were already in the red with stretched balanced sheets at two to 13 times net gearing.

The report said although prospects of the acquisition seemed challenging in the immediate term, MISC’s profitability was a factor supporting the move.

The research house’s earnings forecast for MISC in FY09 is at RM1.4bil compared with RM2.4bil in FY08. Its nine-month earnings for the period ended Dec 31 was at RM1.2bil.

It is also possible that MISC is eyeing another oil and gas fabrication yard since the proposed reverse takeover of Ramunia Holdings Bhd via the injection of subsidiary MMHE for RM3bil did not materialise in November.

But, according to the analyst, the chances were slim as there were only a few fabrication yards in Malaysia.

“Additionally, MMHE had already expanded its land size by 50% to cope with the increasing demand via leasing the land next to its location.

“But, we are not ruling out this possibility that the yard acquisition may replace the takeover of the shipping unit,” he said.

Despite the rosy outlook, MISC is not immune to the effects of the shipping downturn, as it has two underperforming businesses, namely the container shipping and chemical tanker divisions.

The report said the net profit of RM250mil in its third quarter was 24% lower year-on-year as it was dragged down by these two divisions due to oversupply of vessels in the marketplace that had hurt freight rates, especially for container ship.

“Container ship deliveries are expected to rise to 1.7 million 20-foot equivalent units (TEUs) this year and 1.8 million TEUs in 2010, adding an estimated 14% and 13% capacity respectively to the existing fleet.

“As a response to the oversupply situation, measures have been taken by container ship operators to reduce available capacity in the market by laying off vessels and scrapping old vessels to restore freight rates at healthy levels,” it said.

According to Clarkson Research, idle container space in the fleet in February amounted to 800,000 TEUs – equivalent to more than 300 vessels – accounting for 6.5% of available fleet in the beginning of the month.

But the analyst said the losses suffered by these two divisions could be offset by the earnings of its LNG tankers, heavy engineering and offshore operations until the economy stabilised.

Source: http://thestar.com.my/maritime/story.asp?file=/2009/4/6/maritime/3619877&sec=maritime, 06 April 2009