Investment Highlights

• We maintain BUY on MISC with a higher sum-of-parts based fair value of RM9.75/share (from RM8.70/share), which implies an FY20F EV/EBITDA of 10x, on par with its 2-year average, further underpinned by a stable dividend yield of 3%.

• We raise MISC’s FY19F–FY20F earnings by 4%–9% due to a 3- percentage point increase in tanker charter rate assumptions as 9MFY19 core net profit of RM1,242mil (excluding unrealized forex and RM65mil exceptional items) came in within expectations, accounting for 73% of our and 69% of street’s FY19F net profit vs. 66%–72% for the previous first 9 months of the past 5 years. Also, the group declared a third interim dividend of 7 sen which translates to a flattish YTD FY19 dividends to 21 sen that is in line with expectations.

• Nevertheless, our forecasts have yet to incorporate the potential US$1bil projects which MISC expects to secure over the next 12 months. This accounts for only a portion of the over US$4bil potential investments which could be in the pipeline.

• YoY, tanker rates have generally rebounded seasonally with VLCC almost tripling while Suezmax increased by 50% and Aframax by 68% in September this year. We note that long-term charters are also generally up with 3-year rates increasing by 17%–18% YoY.

• LNG spot prices, while down 24% YoY, are rising due to seasonally higher winter demand with rates increasing by 29% QoQ. However, this should not have any immediate impact on MISC’s LNG vessels which are mostly secured on long term charter arrangements.

• Excluding one-off impairments, MISC’s 9MFY19 core net profit rose 37% YoY from: i) the delivery of Eagle Brasilia on 4 January, and Eagle Bintulu on 15 February 2019 with 2 LNG vessels – Seri Bahaf and Seri Balqis – securing short-term charters this year; ii) recovery in tanker charter rates and lower vessel operating costs; iii) higher charter rate for floating storage unit Tenaga 1 & 4; and iv) halving of heavy engineering losses on higher order book recognition. This was partly offset by the absence of construction revenue for the FSO Mekar Bergading in 3QFY18 together with demobilisation costs.

• QoQ, MISC’s 2QFY19 core net profit slid by 28% QoQ to RM323mil mainly from higher dry-docking activities, offshore demobilisation costs and lower revenue from integrated marine, port and terminal services.

• 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%. We will provide further updates following the analyst briefing today.

Source: AmInvest Research - 13 Nov 2019