• We attended MISC’s virtual analyst briefing yesterday and we left the event rest assured that it is fully prepared to undertake and deliver FPSO Mero 3 project seamlessly.

• We believe the execution risk is low as it has outsourced a large chunk of the workscope to credible partners. While this hurts the returns, we believe this project will enhance its track record in the supply of complex FPSO project hence opening up opportunities to secure more projects in the long run.

• Maintain BUY with unchanged TP of RM8.40. We believe current weakness in share price is a good opportunity to accumulate.

Background of Mero 3 project

FPSO Mero 3 project is the third FPSO ordered by Libra consortium (owned by Petrobras, Total and Shell) for the full field development of Libra oil field at the Santos Basin offshore Brazil. The FPSO will be on long term charter for 22.5 years beginning 1H2024. It shall contain 180,000 bpd of oil and 12m cbmpd of gas processing capacity as well as 1.4m barrels of oil storage capacity.

The fruit of 4 years’ preparation

Efforts to expand its footprint in Brazil has started since 2017 with the hiring of personnel with deepwater Brazil experience and it eventually more than double the number of corporate employees in the Offshore Business unit (OBU). Prior to securing Mero 3 project, it has participated in at least 2 bids including Mero 2 project which were intended mainly as trial bids to get used to the Brazilian FPSO project.

Low execution risk

We believe the execution risk is reduced as it has shifted the conversion work to Chinese yard instead of Singaporean yard due to former’s familiarity with Brazilian project. Furthermore, it has tied up with Aker Energy and Siemens as its technical partners to ensure seamless project execution. Accordingly, this lower down project returns which is compounded by high local content requirement of 40%. Management has guided that the capex for the project stands at c.USD2bn which is much higher than USD1bn capex for Yinson’s Brazilian FPSO project.

Sacrificing superior returns for long term benefits

Despite lower return than its peers, we believe MISC will be able to leverage on this project to demonstrate its capability to undertake complex FPSO projects, hence opening up opportunity to pursue projects elsewhere. In fact, it has received several invitations to bid for FPSO projects globally following the project award. In the long run, it seeks to increase the scope that it can be done in-house to gradually improve the return from future FPSO projects.

Maintain BUY with unchanged TP of RM8.40

Reiterate our BUY call on MISC with unchanged SOP-derived TP of RM8.40. We continue to like the company due to its (i) recurring income from its asset-leasing business model, (ii) a midstream company with potential benefit from oil price crisis, and (iii) above-market dividend yield.

Source: BIMB Securities Research - 14 Oct 2020

• Unemployment rate unchanged at 4.7%

• The number of unemployed persons fell by 3.5k to 741.6k in August

• Total labor force increased by 76.6k persons to 15.90 million

• Labor force participation rate improved to 68.4%

• Government initiatives helps in stabilising the job market but challenges linger

Employment recorded a marginal increase of 0.5% mom (Jul: 0.6%) to 15.15 million persons in August. In line with this, the employment-to-population ratio, which indicates the ability of an economy to create employment, increased to 65.2% (Jul: 64.7%). It was observed that the monthly increase of employed person was in the range of 80 to 102 thousand persons since June 2020. Meanwhile, year-on-year comparison, employed persons declined by 0.2% as against August 2019 (15.19 million persons).

The unemployment rate in August remained at 4.7%. The number of unemployed persons decreased marginally month-on-month by 3.5 thousand persons to 741.6 thousand persons (Jul: 745.1 thousand persons). However, the unemployment rate was higher by 1.4 percentage points as against the same month of the previous year (Aug 2019: 3.3%) with the number of unemployed persons increased by 221.4 thousand persons from 520.2 thousand persons.

The number of labour force increased by 76.6 thousand persons to record 15.90 million persons as compared to July 2020. During the month, the LFPR improved 0.3 percentage points to 68.4%. Year-on-year comparison, the number of labour force rose to 189.1 thousand persons (1.2%) from 15.71 million persons in August 2019.

Source: BIMB Securities Research - 14 Oct 2020

• CPO production increased 0.3% mom to 1.87m tonnes in September

• Inventory surged 1.2% mom to 1.73m tonnes

• Palm oil exports improved 1.9% mom to 1.61m tonnes.

• Maintain Neutral on the sector with target average CPO price of RM2,500/MT for 2020 and RM2,400/MT for 2021.

Closing stocks increased 1.24% to 1.73m tonnes in September

Malaysia’s September 2020 inventory climbed 1.24% mom to 1.725m tonnes (-29.5% yoy) against 1.704m tonnes recorded in the previous month. The higher inventory figure reflects the higher production and higher PO import of 48.3k tonnes compared to 32.3k tonnes in August 2020, aided by lower local consumptions estimated at 284k tonnes (- 7.4% mom) during the month. Notably, stocks of CPO and PPO (processed PO) increased 0.4% and 2.2% mom to 934k tonnes and 790k tonnes respectively during the period. We expect stock level to remain elevated in the coming months as production increases whilst demand moderates.

Export improved 1.9% to 1.61m tonnes

Palm oil export volume improved 1.88% mom to 1.612m tonnes in September 2020 as major importing countries like India, Philippines, Netherlands, USA and Benin increased their PO intake. We anticipate that demand from China and India would continue to be healthy in preparation for festivities and replenishing activities as their stockpiles are relatively low at current level. Nonetheless, for Jan-Sept’20 period, demand weakened 8.9% yoy to 12.8m tonnes against 14.0m tonnes recorded in the same period last year.

Production increased 0.33% mom to 1.87m tonnes.

Malaysia’s CPO production increased 0.33% mom to 1.869m tonnes in September 2020 as sector is currently in the seasonally higher production month (+1.46% yoy) of Sep-Nov. The higher production was led by Sabah which surged by 11.8% mom to 447k tonnes, followed by Kelantan (+4.6%), Pahang (+1.1%), Negeri Sembilan (+0.6%) and Johor (0.4%); whilst others recorded a decline in growth. As for Jan-September 2020 period, CPO production dropped 3.97% yoy to 14.587m tonnes, i.e. making up 77% of our 2020 forecast. We forecast CPO production for this year to fall 5% yoy to 18.87m tonnes on account of reduced yields due to dry weather, biological tree stress and low fertilisers usage as well as labour shortages.

Average CPO prise forecast maintained at RM2,500/MT for 2020 and RM2,400/MT for 2021.

The BMD’s 3-month CPO futures price for the month of September traded range-bound, closing the month at RM2,714/MT (-0.88% mom). On the other hand, the average CPO price for local delivery increased 3.9% mom to an average of RM2,924/MT against RM2,815/MT recorded in the previous month; believed to be due to positive sentiment on better demand prospect and possible hiccup in production due to labour shortage and unfavourable weather conditions. As for Jan-Sept 2020 period, the MPOB average CPO price of RM2,573/MT was higher by RM571/MT or 28.5% against RM2,002/MT recorded in the same period last year.

Although CPO price (local delivery) is currently traded at RM3,003/MT, we are of the view that the upside is limited due to the recent increase in Covid-19 cases, volatile crude oil prices, unsettled US-China trade-dispute, and slower global economy, which would cause demand to continue to be moderate. We predict that price may decline to RM2,500/MT – RM2,700/MT as palm oil harvest enters its peak production month (probably in October or early November) and coincides with soybean harvesting season in US.

Risk factors for our CPO price estimate include 1) slower economic growth and consumption of edible oils, 2) lower-than-expected demand, 3) ample supply and stockpiles of Soybean and SBO, 4) narrowing of the price differential between CPO and SBO, 5) weakening of crude oil prices, and 6) prolong Covid-19 pandemic and movement restriction.

Maintain “Neutral”

Maintain Neutral on the sector. Although CPO prices have been bullish lately, our view is that earnings upside could be limited by high operational costs and suppressed profit margin on lower-than-expected production and sales volume – with labour issue remaining as a key concern for planters, especially during the higher production month in Oct-Nov. We expect performance of pure plantation companies to be favourable given current palm products prices currently trading above 2019’s average price. Nonetheless, there might be profit margin squeeze for downstream players due to higher feedstock price and keen competition especially from petrochemical products that will impact demand, hence affecting sales volumes of bio-based products. We maintain our earnings forecast with BUY call on TSH (RM1.23), SOP (RM4.30) and Sarawak Plant (RM1.94) whilst retaining HOLD recommendation on KLK (RM23.10), IOI (RM4.80), GENP (TP: RM10.00), FGV (TP: RM1.04), SDPL (TP: RM4.83) and HAPL (TP: RM1.66); whilst non-rated for TH Plant.

Source: BIMB Securities Research - 13 Oct 2020

• IPI slows to 0.3% yoy in August

• Growth in IPI led by manufacturing component, while the mining and electricity segments showed a decrease

• Slower growth in manufacturing sales

• Productivity slows to 4.3% yoy

• Growth in global semiconductor sales continue in August

• Global production recovery continues as IPI signal upturn

• Industrial production will continue to recover supported by growing domestic spending and increased trade activities

IPI slows to 0.3% yoy in August

Industrial production (IPI) rose by 0.3% yoy in August, slowing from a 1.2% yoy growth a month earlier, amid ongoing COVID-19 pandemic. Growth in IPI for August was led by a rise in the manufacturing component, while the mining and electricity segments showed a decrease.

On monthly basis, the IPI in August declined 1.2%. Based on month-on-month comparison, the weakening of IPI in August was due to the increase in the index of manufacturing (-1.9%). On the other hand, the mining and electricity segments showed increases of 0.3% mom and 2.9% mom respectively. In a seasonally adjusted terms, IPI in August recorded a deterioration of 0.5% due to the decline in manufacturing index of 0.8%. However, the mining and electricity index recorded an increase of 3.9% and 2.8% respectively.

The IPI in the period January to August 2020 recorded a decline of 6.4% as compared to the same period of the previous year. This deterioration was due to the decrease in all indices; mining index (-9.4%), manufacturing index (-5.6%) and electricity index (-5.0%).

Source: BIMB Securities Research - 13 Oct 2020

• Distributive trade sales declined 2.3% yoy

• Wholesale and Retail trade recorded a lower drop

• Retail sales supported by pent-up demand globally

• Retail sales to grow amid pandemic recovery continues

Malaysia’s distributive trade recorded RM111.4bn in August with a growth of -2.3% yoy from -3.5% in July. Although distributive trade declined for the fifth consecutive month, this was the highest sales value since the implementation of Movement Control Order due to COVID-19.

Motor vehicles grew positively for two consecutive months to record 1.0% yoy or an increase of RM0.1bn. This increase was driven by sale of motor vehicles which registered a growth of 3.1% and sale, maintenance & repair of motorcycles 2.4%. A total of 52,800 vehicles were delivered in August (-8% mom, +3% yoy). YoY growth was driven by the SST exemption sales which started mid-June, and will last up to December 2020. Whereas, the MoM drop was due to the clearance of backlog orders in July 2020 and short working month in August 2020 from a few festive holidays.

Wholesale trade generated sales value of RM51.9bn in August, a decrease of RM2.1bn (-3.9%) as against August 2019. Other specialised wholesale and wholesale on a fee or contract basis recorded a fall of 13.5% yoy and 6.2% yoy respectively. Sales of retail trade registered a negative growth of 1.5% yoy. Among groups that contributed to this fall were retail sale of cultural & recreation goods in specialised stores (Aug: -9.7%; Jul: -10.5%; Jun: -18.7%; May: -27.8%; Apr: -53.2%), retail sale of other goods in specialised stores (Aug: -7.2%; Jul: -10.8%; Jun: -17.1%; May: -28.0%; Apr: -56.8%), and retail sale of automotive fuel in specialised stores (Aug: -5.6%; Jul: -7.6%; Jun: -15.8%; May: -27.2%; Apr: -56.3%).

On monthly basis, sales value of Wholesale & Retail Trade grew 2.5% in August, contributed mainly by the wholesale trade sub-sector. The wholesale trade sub sector, which contributed the most to the increase of Malaysia’s sales, rose 3.7% to RM51.9bn, followed by retail trade, which increased 7.1% to RM45.8bn. However, sales of motor vehicle declined 0.7% to RM13.8bn.

Source: BIMB Securities Research - 13 Oct 2020

• We view MISC as a defensive oil and gas stock owing to its (i) recurring income from its asset-leasing business model, (ii) a midstream company with potential benefit from oil price crisis, and (iii) above-market dividend yield.
• We think it deserves a re-rating following various expansion plan which we estimate could double its orderbook to RM48bn.
• Our estimates imply a 18% earnings CAGR over FY2019-22F driven by income from 19 new petroleum tankers and LNG vessels and construction gains from new FPSO Mero 3 project.
• We initiate coverage on MISC with a BUY call and RM8.40 SOPderived TP. This implies 1.1x FY21F P/B.

​​​​​​​A defensive oil and gas stocks

We view MISC as a defensive oil and gas stocks whose earnings are mostly backed by recurring income from long-term charter contracts in LNG and FPSO business. We estimate its orderbook to be worth c.RM23bn which is c.6.5x FY19 LNG and FPSO combined revenue. In addition, it is a one of the beneficiaries of low oil price due to oil tanker vessels used by traders to store excess oil when the market is oversupplied, leading to higher tanker rate. MISC pays dividend quarterly which currently yields c.3.5-4%.

On spending spree for asset acquisition

Under its asset leasing business model, the leased assets provide steady cash flows. Meanwhile MISC is also looking to acquire more asset to grow its earnings. In the near-term, it is set for huge capex spending to sustain its earnings growth. Management expects to spend c.USD3bn over the next 3-4 years by acquiring new vessels and constructing the FPSO Mero 3, which we expect could double its orderbook to c.RM48bn.

Sustainable earnings growth ahead

Based on our estimates, we expect MISC to deliver strong earnings growth of 18% CAGR over 2019-22F. Our forecast factors in: i) FPSO Mero 3 worth USD2bn of capex and ii) new income from additional 19 new petroleum tankers and LNG vessels. This is further supported by increasing tanker rates due to oversupply in oil supplies leading to more tankers are used for offshore storage.

Initiate with BUY and TP of RM8.40

We initiate coverage on MISC with BUY and RM8.40 TP based on sumof-parts (SOP) method (Table 4). This implies 1.1x FY21F P/B. While it currently trades at 5-year mean P/B of 0.9x, we think it deserves a rerating following its expansion plan.

Source: BIMB Securities Research - 12 Oct 2020