Investment Highlights

• We downgrade our recommendation on MISC to HOLD from BUY with a lower sum-of-parts based fair value of RM8.80/share (from an earlier RM9.75/share), which implies an FY20F EV/EBITDA of 10x, on par with its 3-year average and 40% premium to AP Moller Maersk.

• We expect MISC’s FY19F earnings, which will be announced tomorrow, to come in within expectations given that petroleum tanker rates in December 2019 have generally improved YoY with daily charter rates for Suezmax vessels rising 69% vs. VLCC, soaring 2.3x to US$95K and Aframax up 52% to US$67K, even though the winter season in the northern hemisphere appears to be relatively mild.

• However, we have lowered FY20F–21F earnings by 3%–5% due to a 2 percentage-point decrease in spot petroleum charter rate assumptions. This stems from a sharp reduction in petroleum charter rates since the beginning of the year, with the Worldscale flat rates for the Arabian Gulf to Japan dropping 70% to WS 40 level currently, while the Arabian Gulf to US Gulf Coast (USGC) has fallen by 55% (see Exhibit 1).

• Worldscale, published by the Worldscale Association (London) Limited and the Worldscale Association (NYC) Inc, is a unified system of establishing an average total tanker cost of shipping oil from one port to another.

• YoY, the Worldscale flat rate for the Arabian Gulf-Japan route is down 6% while the Arabian Gulf-USGC is still up 62%, partly due to the impact of the International Maritime Organisation’s (IMO) 2020 regulations on sulfur emissions cap at 0.5% on marine fuels. However, the earlier tanker constraints from the IMO2020 impact were partly offset by the lifting of US sanctions related to Iran on a unit of Cosco, China’s largest tanker owner, last month.

• However, news that China vessels are being denied entry with crew forced to spend extra time in quarantine at sea is depressing charter rates, given that China accounts for 30% of global shipping. AP Moller Maersk has cancelled 20 shipments to China since the Wuhan novel coronavirus (Covid-19) outbreak while other operators are charging a premium.

• As the term-to-spot portfolio mix for MISC’s petroleum tanker division has reduced from 65:35 to 60:40, MISC is still susceptible to lower charter rates. We estimate that a 10% decrease in spot charters can reduce the group’s FY20F earnings by 8%.

• For the group’s offshore business, speculations are growing of delays in the award of projects in the region given that Brent crude oil prices have fallen below US$60/barrel on concerns that global demand and economic growth outlook could be dampened by the Covid-19 epidemic.

• The stock currently trades at a fair FY20F EV/EBITDA of 9x – 5% below its 3-year average and supported by decent dividend yields of 4%.

Source: AmInvest Research - 17 Feb 2020