Investment Highlights

• We maintain our BUY recommendation on MISC with an unchanged sum-of-parts based FV of RM8.70/share, implying an FY20F EV/EBITDA of 9x, below its 2-year average of 10x, which is further underpinned by a stable dividend yield of 3%.

• Just after securing a 3-year charter worth US$28mil from Avenir LNG Ltd to provide an LNG (liquefied natural gas) bunker vessel in Malaysia and Singapore, MISC has signed time charter contracts with Exxon Mobil Corporation’s wholly-owned SeaRiver Maritime LLC. for 2 newbuild LNG carriers to operate in international waters.

• The 2 vessels, to be called Polaris 1 and 2, and expected to commence in 1Q2023, will be chartered for a firm period of 15 years with an estimated combined contract value of US$711mil.

• The vessels, which will add to MISC’s current operating fleet of 30 LNG vessels, will be constructed by Korea’s Samsung Heavy Industries. We estimate that these 2 contracts can add 2% to the group’s FY23F earnings and 1% to its SOP, while raising its FY21F net gearing slightly from 19% to 22%.

• While the impact of the contracts will not be significant to the group overall, we remain optimistic on MISC’s improving prospects given that oil tanker rates have surged above US$100,000/day on the benchmark Middle East-China route on seasonally higher Northern winter demand, increasing risks of US sanctions and an upcoming International Maritime Organization requirement for low sulfur bunker fuel on 1 January 2020.

• According to the Baltic Exchange, the VLCC daily rates for shipping from the Middle East to China have risen to a 2.5-year high of US$113,047. The US imposition of Iran-related sanctions on Chinese companies, including China’s COSCO Shipping Corp, appears to be among the factors that propelled higher rates.

• Additionally, Exxon Mobil Corp has avoided chartering vessels that have serviced Venezuelan routes over the past 12 months. Given that 35% of MISC’s petroleum vessels are on spot, we estimate that a 10% increase in spot charters can raise the group’s FY20F earnings by 8%.

• Additionally, management has indicated that an active bidding market has emerged in all its key segments, offshore floaters, LNG and shuttle tankers over the past 3 years.

• 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 stock currently trades at an attractive FY20F EV/EBITDA of 8.7x – 13% below its 2-year average, and supported by fair dividend yields of 4%.

Source: AmInvest Research - 11 Oct 2019