Investment Highlights

• We maintain our HOLD recommendation on MISC with an unchanged fair value of RM6.65/share, which is at a 20% discount to our sum-of-parts valuation of RM8.31/share. This implies an FY19F EV/EBITDA of 8x, below its 2-year average of 10x but a premium of 20% vs AP Moller-Maersk.

• We came away from the analyst teleconference yesterday reaffirming our forecasts as follows:

• Average petroleum spot rates seasonally weakened QoQ in 2QFY19 and are likely to continue likewise in 3QFY19, despite rates currently higher on a YoY comparison.

• Although management indicated that MISC’s tanker fleet is ready for the IMO2020 regulations on low-sulfur marine fuel by January 2020, the group’s fixed term to spot composition has been steadily rising from 50% in the past 2 years to 65:35 currently to moderate the segment’s earnings volatility. In 1HFY19, the petroleum segment rebounded to an operating profit of RM168mil from a 1HFY18 loss of RM94mil.

• There is a likelihood that the IMO2020 rule could partly support tanker rates as ship supply could be constrained by vessels being taken out of service for scrubber retrofitting amid rising US oil exports and tonne-mile demand. This could be mitigated by an expanding global fleet with almost 10mil deadweight tonnes (DWT) expected to be delivered for the rest of 2019 while only 2mil DWT were scrapped in 1H2019.

• While the LNG segment’s 2QFY19 operating profit was only slightly impacted by higher dry docking activities and slight impairment, rates could soften towards the end of the year as newbuilding orders remain high at 48 vessels for this year while rising to 53 vessels in 2020 and 72 vessels in 2021.

• The LNG tanker market already appears to be softening with spot rates dropping 70% QoQ due to high stock inventory, vessel overcapacity and low seasonal demand. However, this should not have any immediate impact on MISC’s LNG vessels which are secured on long-term charter arrangements.

• Oil exports volumes were reduced by the US decision to end its waivers on Iranian sanctions, imposition of sanctions on Venezuela, ongoing Opec+ production cuts together and longer-than-expected Asian refinery shutdowns against the backdrop of IMO2020 regulations.

• While tanker rates are currently higher YoY, moving past the peak summer season could mean that petroleum spot rates may begin to soften in 3QFY19. The strength of recovery in 4QFY19 will largely depend on the severity of the northern hemisphere’s winter season.

• The stock currently trades at a fair FY20F EV/EBITDA of 8x – 33% premium to AP Moller-Maersk’s 6x, supported by fair dividend yields of 4%.

Source: AmInvest Research - 15 Aug 2019