MISC Annual Report 2019

I am a big believer in the identification and the use of long-term trends and inflexion points as strategic decision drivers. Partly because of my tertiary education in economics, and partly because of my experience as an analyst in my previous profession. I am a big advocate of building long-term growth strategies along long-term economic and industrial drivers. This approach helps any organisation to achieve steady and sustainable growth over time while navigating around short-term volatility. It safeguards companies from the temptation of pursuing short- term rewards that are anchored around short-term and unsustainable business/economic circumstances that may very well sacrifice future benefits. It also helps companies to avoid reading too much into short- term volatility and uncertainty but instead, focus on the consistency and predictability of long-term fundamentals. Hence, despite the uncertain economic and business landscape of 2019, we remained quietly confident that opportunities would come our way, as suggested by our understanding of certain industry trends. Granted, the year started slowly with many growth projects that we were prioritising appearing to stall. Project sponsors and clients were hesitant in their respective decision-making given the volatile global business climate, driven especially by the trade war between China and the US. Our conviction was rewarded by the second half of the year. Including a new investment project that was officially awarded to MISC in early 2020 (with the bulk of the efforts in 2019), we have been able to deliver approximately USD1.1 billion of new investments for the year. It is most appropriate that we are continuing with the theme of People, Passion, Possibilities for this year’s Annual Report. Our secret weapon for 2019 against the unpredictability and volatility in the world? Our people, who were united in our efforts as a team and family. I wholeheartedly believe that our people, fuelled by their passion to be consistently better, unified by a conviction that we are capable of competing with the best globally, and make the impossible possible, are the true heroes of MISC in 2019. I salute them. Our Financial Performance We also had a good year in terms of financial results. The Group revenue of RM8,962.7 million for the financial year ended 31 December 2019 was 2.1% higher than the previous year. Our operating profit showed a 31.6% increase from the previous year to RM1,929.3 million for the current financial year. The substantial increase in operating profit was mainly due to the higher number of operating vessels in our LNG Asset Solutions segment and higher freight rate margins achieved in the Petroleum & Product Shipping segment. The Group’s profit before tax increased by 12.5% to RM1,512.3 million from the previous year’s profit before tax of RM1,344.1 million. The cash flow from operations meanwhile, saw a 36.1% increase to RM5,579.1 million over the previous year, contributed by the improved operating results. We continue to maintain a strong balance sheet. With the improvement in our cash and bank balances, we are in the favourable position of having a lower net debt-to-equity ratio of 0.17 compared to 0.20 in 2018. The Group’s earnings per share for the current financial year increased to 32.0 sen, from 29.4 sen in the prior year. For the financial year 2019, profit attributable to the equity holders of MISC was higher by 8.8% at RM1,426.4 million from RM1,311.5 million in 2018. How Our Core Businesses Performed Our LNG Asset Solutions segment had an excellent year, contributing to the lion’s share of the contracts secured by the Group. More noteworthy in terms of our strategic journey was that we made significant strides towards expanding our third-party business with premium customers. We won long-term charters for two newbuild LNG carriers with SeaRiver Maritime L.L.C., a wholly-owned subsidiary of Exxon Mobil Corporation, and formed a joint venture partnership with Mitsubishi Corporation and Nippon Yusen Kabushiki Kaisha (NYK) to co-own two newbuild LNG carriers. Also, in line with our strategic priorities, the LNG Asset Solutions segment made a breakthrough into the non-conventional LNG solutions sector by securing a time charter contract for an LNG bunkering vessel – our first – with PETRONAS, in collaboration with Avenir LNG. The Petroleum & Product Shipping segment started 2019 with some optimism, amidst still-difficult market conditions. Over the year, we saw an improvement in tanker freight rates compared to 2018, which contributed to the segment’s improved financial performance in 2019. While we were buoyed by the positive market environment, we did not take our eyes off our strategic goal of increasing our secured income base, and thus we continued to build momentum in securing more long-term DPST contracts. The segment ended the year with the announcement of the award of long-term charters from Shell for three DPSTs, and this was followed in February 2020 with the award of another three DPSTs by Brazil’s Petrobras. Once all our 13 newbuild DPSTs are delivered over the next few years, we would be one of the global market leaders in this niche segment. Despite some volatility, oil prices in 2019 were in a range that were supportive of continued investment in the upstream sector. Our Offshore Business segment was actively pursuing growth opportunities in Brazil, Southeast Asia and the Middle East. Behind the scenes, much effort was being devoted by the management towards solidifying our foundation, developing our deepwater capabilities and enhancing our operations and maintenance capabilities. Our primary goal is to enhance our presence as a major player in Brazil, which is one of the major hotspots for FPSOs in the world. We have made much progress and are ready to compete against the best in that space. The Marine & Heavy Engineering segment showed much improved financial performance during the year. For the past few years, we have been working intensively to strengthen our capabilities and competitiveness, and we are starting to see the results. We did well in 2019 to secure several new major projects such as the Kasawari Gas Development project, and also made headway to diversify our revenue streams through contract wins in plant turnaround and maintenance. Dry Dock 3, which is scheduled for completion in 2020, will increase our marine segment revenue opportunities. Understanding MISC’s Business and Income Model It may be confusing to some in trying to understand MISC’s business and income model. If one pays too much attention to the technical aspects of our operations, and we have multiple businesses and operations, it can be confusing and hard to grasp. Let me assist by simplifying it in layman terms. First, put aside the type of businesses MISC is in. Just take note of a very fundamental fact - MISC is an asset leasing company. What this means is that our business is to own assets and to lease them to users who will lease/ hire them. In return, the hirers or charterers, to be technically precise, pay us a lease income. It is as simple as that. Next, apply the fact that MISC operates within the global maritime supply chain. Specifically, we are a shipping company. Our assets are, therefore, ships or vessels. In the upstream production segment where we are also present, we own various floating assets. FPSOs and FSOs are typically vessel-looking production assets mobilised for the production of oil and gas in deepwater fields or for small or marginal fields. There are a few key aspects of this business and the associated income model. Firstly, each asset requires a hefty capital expenditure or investment. The investment cost per asset can range from USD60-70 million for an Aframax-size crude oil tanker to approximately USD200 million for an LNG tanker. For more complex assets like FPSOs, the investment cost could climb as high as ten-fold to USD2 billion. In addition, an FPSO investment can carry substantial construction risks. To fund the construction of these assets, besides our own equity, we require the support and partnership of the international banking fraternity in the provision of long-term borrowings. Hence, it is imperative that we are able to generate enough cash flow from the asset leases so that we can honour our debt repayment obligations. If we do not have predictability or security in our long-term leases and the associated cash flows, we run a high risk of not being able to meet our financial obligations. To ensure that we have predictability and security in our leases, we therefore, prefer to work on long-term leases (the longer the better, to match the period of the loan repayment). To ensure our charterers will honour the leases which we have entered into, we need to focus on working with the right counterparties. And of course, MISC must be able to operate and maintain those assets to the highest standard as practically possible as our commitment to the counterparties. Summing these factors together, in order for MISC to thrive in the long-term and to be able to generate sustainable and recurring performance, we must ensure that we have the right assets, the ability to operate them with the highest standards of excellence, secure the right long-term charter contracts for these assets and partner the right customers. This congruence is what will produce favourable levels of predictable income. Explaining the business and income model is the easy part. Delivering the model is something else. Achieving the ideal scenario as described requires us to undertake very rigorous risk assessments, be very careful in managing our financial resources and have a very disciplined approach before bringing opportunities to the Board of Directors for approval. To achieve that, we map out the scenarios before us and think them through in order to see how we can maximise our chance of success and minimise possibility of failure, which also prepares us to enter into negotiations with a high level of confidence. Complementing our very structured risk assessment process is our financial strength, which allows us to raise the necessary funding for the projects that we bid for. MISC continues to have the strongest credit rating in the maritime sector - a stature that we bear with a lot of responsibility and pride. President/Group CEO’s Review 21 THE YEAR IN REVIEW ANNUAL REPORT 2019 20 MISC BERHAD PEOPLE. PASSION. POSSIBILITIES