Investment Highlights

• We maintain our HOLD recommendation on MISC with unchanged forecasts and sum-of-parts-based fair value of RM8.30/share, which implies an FY20F EV/EBITDA of 10x, on par with its 3-year average and at 40% premium to AP Moller Maersk.

• Following the analyst teleconference yesterday, we remain cautious on MISC’s prospects. Here are the highlights:

Management expects MISC’s time charters for its LNG and petroleum tankers to largely cushion the impact from reduced demand for petroleum tankers due to seasonality and concerns over the Wuhan coronavirus (Covid-19) outbreak.

Currently, all of MISC’s 29 liquefied natural gas (LNG) carriers are secured by long-term charters while only 28% of the group’s 71 petroleum/chemical tankers are on spot rates. At this stage, its 14 very large crude carriers (VLCC) are wholly on term charters vs. 74% for Suezmax, 44% Aframax and 52% for chemical tankers. However, as petroleum term charters are usually 1–3 years, even VLCCs can be impacted by lower rates amid a prolonged Covid-19 outbreak.

Management reiterated that MISC has minimal exposure to China routes, which are only limited to some VLCCs and chemical tankers. These are already on term charters with clients such as Maersk Tankers who can redeploy to other destinations. MISC also does not expect significant impact on the rollout of offshore projects which the group is interested in participating given the distance of Brazil to the Covid-19 epicentre.

Currently, none of MISC’s staff has tested positive for Covid-19 while shore leave and crew changes are restricted in China. Also, neither procurement nor repairs/drydocking activities are being undertaken in China.

The mitigation to lower charter rates could be higher offshore tanker demand given the increase in crude oil inventories arising from lower China demand. Also, temporary China yard closures could delay the delivery of new vessels, softening capacity overhang pressures.

MISC’s petroleum tanker revenue decreased 9% YoY to RM1.2bil partly due to lower operating days as 4 lossmaking chemical vessels were sold to Maersk Tankers. Additionally, 4QFY19 associate contributions plunged 71% QoQ and 54% YoY to RM24mil due to one-off FSO Ruby contract extension gains and recognition of additional demobilisation costs. These items partly caused MISC’s FY19 core earnings to come in below our earlier forecast.

• Meanwhile, tanker rates have sharply decreased since the beginning of the year, with Worldscale flat rates for the Arabian Gulf to Japan dropping 70% to WS 40 level currently, while that of the Arabian Gulf to US Gulf Coast (USGC) have fallen by 55% (see Exhibit 1). The stock currently trades at a fair FY20F EV/EBITDA of 9x – 5% below its 3-year average while supported by decent dividend yields of 4%.

Source: AmInvest Research - 19 Feb 2020