Investment Highlights

• We upgrade our recommendation on MISC to BUY from HOLD with a higher fair value of RM8.70/share (from an earlier RM6.65/share), due to our higher earnings expectations and the removal of a 20% holding company discount to our higher sum-of-parts given its significantly improving job prospects. This implies an FY20F EV/EBITDA of 9x, below its 2-year average of 10x, which is further underpinned by a stable dividend yield of 3%.

• Our FY20F–FY21F earnings have been raised by 4%–14% on an increased number of shuttle tankers which will be operating in Brazil – an incremental 2 in 4QFY19 and 5 in FY20F. Recall that in May last year, MISC secured 10 year-charters for 4 specialist DP2 Suezmax-size shuttle tankers from Petróleo Brasileiro S.A. (Petrobras).

• Management has indicated that prospects over the past 2 months have substantively improved from the project scarcities experienced during 1HFY19. Hence, MISC expects an active bidding market to materialise in all its key segments, offshore floaters, LNG and shuttle tankers.

• However, our forecasts have not reflected the potential US$1bil projects which MISC expects to secure over the next 12 months, pending official announcements progressively starting from October this year. This is only a portion of the over US$4bil potential investments which could be in the pipeline.

• The largest of the group’s tender prospects will be the US$2bil Mero-3 floating production, storage and offloading (FPSO) vessel for Petrobras, which will have a capacity of processing 180,000bpd of oil and 12mil cubic metres of natural gas per day.

• MISC, in a technical joint venture with Siemens Group and SGXlisted Sembcorp Marine, is running against Modec and SBM Offshore in the bid which is expected to open 19 Dec this year. An award is likely by April 2020 with operational commencement in 2024. Assuming a project IRR of 12%, WACC of 6.5% and equity stake of 50%, we estimate that a successful bid could raise the group’s SOP by 45 sen/share.

• MISC is also bidding together with Yinson Holdings for Petronas Carigali’s Limbayong FPSO against Sabah International Petroleum and a consortium between MTC Group and India’s Shapoorji Pallonji Oil & Gas. Together with multiple LNG vessel and shuttle prospects emerging in North America, Australia and Qatar, the group expects to be bidding for long-term charters to provide accretive step-ups in its sustainable earnings base.

• VLCC and Suezmax tanker rates are currently higher YoY by 9%– 81%, with the coming seasonality towards the end of the year likely to drive them even higher depending on the severity of the northern hemisphere’s winter cycle. Management reaffirmed that MISC’s earnings will not be impacted by the IMO2020 regulations on low-sulfur marine fuel by January 2020 as the group has been in preparation since 2017.

• The stock currently trades at an attractive FY20F EV/EBITDA of 8x – 20% below its 2-year average, and supported by fair dividend yields of 4%.

Source: AmInvest Research - 5 Sept 2019