Investment Highlights

• We maintain our BUY recommendation on MISC with an unchanged sum-of-parts based fair value of RM8.70/share, which implies an FY20F EV/EBITDA of 9x, below its 2-year average of 10x, further underpinned by a stable dividend yield of 3%. Our forecasts are unchanged as the delivery of 2 liquefied natural gas (LNG) vessels will negligibly contribute to FY21F earnings onwards.

• MISC has signed an agreement with Mitsubishi Corporation (MC) and Nippon Yusen Kabushiki Kaisha (NYK) to co-own 2 newbuild LNG vessels which will have individual capacities of 174,000 cubic metres. The vessels, currently being built by Hyundai Samho Heavy Industries for delivery in 2021, will be on time charter for Diamond Gas International Pte Ltd’s global transportation needs, particularly for the US and Canadian markets in which Petronas’ wholly-owned North Montney LNG Limited Partnership holds a 25% participating interest in the LNG Canada project.

• MISC’s interest in the total contract value is estimated at US$202mil over a firm period of 18 years. Assuming the cost of the new vessels are around US$200mil each with a project IRR of 8%, we estimate that MISC’s stake in the consortium could be below 30% which will add less than 1% to FY21F earnings. Assuming a debtto-equity financing of 80:20, the group’s net gearing impact will also be likewise negligible.

• MC, which has a market cap of US$41bil, is a global conglomerate involved in natural gas, industrial materials, petroleum & chemicals, mineral resources, industrial infrastructure, automotive & mobility, food industry, consumer industry, power solution and urban development. NYK, which has a market cap of US$3bil, is a global transportation company operating a fleet of ocean vessels, planes and trucks.

• While the impact of this contract will not be significant to the group overall, we remain optimistic that prospects over the past 2 months have substantively improved from the project scarcities experienced during 1HFY19. Hence, management has indicated that an active bidding market has emerged in all its key segments, offshore floaters, LNG and shuttle tankers.

• Note that 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. 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.

• 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 - 25 Sept 2019