Investment Highlights

• We maintain our BUY recommendation on MISC with an unchanged sum-of-parts-based fair value of RM9.75/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 came away from the analyst teleconference yesterday reaffirming sanguine expectations for MISC’s prospects as follows:

• Management expects more charter awards to be announced towards the end of this year, as our earlier updates in September had indicated potential US$1bil projects over the next 12 months. This is only a portion of the over US$4bil potential investments which could be in the pipeline.

• While there have been some concerns that MISC’s vessels could be rerouted by clients avoiding destinations in Venezuela, management indicated that there is no impact the group. Recall that Exxon Mobil Corp has avoided chartering vessels that have serviced Venezuelan routes over the past 12 months.

• The portfolio mix for the petroleum tanker division has reduced from 65:35 to 60:40 for term-to-spot charters, which means that MISC should be able to capitalize on the current rising charter rate trajectory. We estimate that a 10% increase in spot charters can raise the group’s FY20F earnings by 8%. As a comparison, tanker rates have generally rebounded seasonally with VLCC almost tripling YoY while Suezmax increased by 50% YoY and Aframax by 68% YoY in September this year.

• The surge in VLCC stems from the drone attacks on Saudi Arabian oil facilities in September as charterers rushed to load them from the Middle East against the backdrop of the US imposition of Iran-related sanctions on Chinese companies including China’s COSCO Shipping Corp while Asian buyers diversified supply risks. We note that longterm charters are also generally up with 3-year rates increasing by 17%–18% YoY.

• MISC’s 3QFY19 was largely impacted by lower earning days, decommissioning charges for the FSO Angsi and lower revenue from integrated marine, port and terminal services. The group’s 3QFY19 LNG operating profit slid 13% QoQ to RM278mil largely due to 4 vessels being dry docked vs. 3 in 2QFY18 while petroleum shipping dropped by 37% QoQ to RM21mil due to lower lightering days given lower US crude oil imports.

• Tanker rates are currently already higher YoY and are likely to rise further towards the year-end winter season even though this will depend on the severity of the northern hemisphere’s climate early next year. The stock currently trades at an attractive FY20F EV/EBITDA of 8.8x – 12% below its 2-year average and supported by fair dividend yields of 4%.

Source: AmInvest Research - 14 Nov 2019