Investment Highlights

• We maintain our HOLD recommendation on MISC with unchanged forecasts and fair value of RM6.65/share, which is at a 20% discount to our revised sum-of-parts valuation of RM8.31/share. This implies an FY18F EV/EBITDA of 8.5x, below its 2-year average of 10x but in line with AP Moller-Maersk.

• MISC’s 51%-owned joint-venture with PetroVietnam Technical Services Corporation (PTSC) has been awarded a 7-year time charter contract worth US$176mil (RM736mil) to provide a floating storage and offloading vessel (FSO) by Idemitsu Kosan Co Ltd (IKC).

• Upon conversion of the donor vessel, the FSO will be deployed for the Sao Vang and Dai Nguyet Development Project in Blocks 05-1b and 05-1c offshore Vietnam with commencement expected by 2020.

• PTSC is a state-owned oil & gas services provider in Vietnam while Japan-based IKC is engaged in petroleum refining and manufacture and sale of oil products, manufacture and sale of petrochemical products, and the exploration, development and extraction of petroleum, coal and geothermal resources.

• Following the group’s acquisition of the FSO Mekar Bergading from EA Technique in July this year, this additional unit will increase MISC’s portfolio of offshore vessels to 14 and under operation to 12.

• We are slightly positive on this development as the impact to the group will be marginal. Assuming a project IRR of 10%, WACC of 5% and conversion cost of US$140mil, we estimate that this charter could add 2% to FY20F earnings and below 1% to the group’s SOP.

• Besides these FSOs, the group’s earlier FY18F committed capex of US$600mil could double with the delivery of 2 LNG carriers, 2 Suezmaxes, and 3 Aframaxes. This includes the 4 shuttle tankers for Petrobras and the addition of 2-3 tankers in Southeast Asia. MISC should be able to tap external financing as its net gearing stands at 0.2x currently.

• Petroleum tanker have started to seasonally rise in tandem with the winter season in the northern hemisphere, with VLCC spot up 36% QoQ and Aframax 23% QoQ. Suezmax is largely unchanged QoQ but is starting to rise as well, up 8% month-onmonth and already up 20% YoY.

• However, we remain optimistic that charter rates could improve with the coming relaxation of Organisation of Petroleum Exporting Countries’ (OPEC) production quotas, enforced since late 2016, amid normalising global inventories and resumption of US nuclear sanctions on Iran.

• The stock currently trades at a fair FY18F EV/EBITDA of 8.5x, in line with AP Moller-Maersk, and supported by attractive dividend yields of 5%.

Source: AmInvest Research - 30 Oct 2018