Investment Highlights

• We upgrade our recommendation on MISC to HOLD from SELL with a higher sum-of-parts-based fair value of RM7.40/share (from an earlier RM5.60/share), which implies an FY20F EV/EBITDA of 9x - its 3-year average and at 40% premium to AP Moller Maersk.

• Bloomberg reported that spot petroleum tanker rates have risen by 700% over the past week to US$243k/day due to Saudi Arabia securing additional storage capacity for the expiry of the OPEC production quota by the end of this month.

• Saudi Arabia has begun hiring 25-30 additional Very Large Crude Carriers (VLCC) to be deployed late this month or early April 2020 after OPEC’s recent negotiations with Russia was unsuccessful.

• Recall that Saudi Arabia has announced unprecedented discounts of almost 20% in key markets, apparently targeting Russia and the US shale industry as well as other higher cost producers.

• Saudi Arabia’s crude into north-west Europe, a key market for Russian barrels, will be sold at discounts to its reference price of over US$8/barrel compared to March 2020. In the US, the country is also set to discount its crude by US$7/barrel in April compared with March. Saudi Arabia also made prices cuts of between US$4-6/barrel to Asia.

• Over the past week, Saudi Arabia, Russia, Iraq, Nigeria and the United Arab Emirates have all indicated plans to lift supply in the coming months. As such, crude is currently trading in a deep contango price pattern, where traders store lowly priced spot barrels at sea for sale at higher future prices.

• Since the beginning of the month, Worldscale flat rates for the Arabian Gulf to Japan has surged by 3.6x to WS 172.5 level currently, while that of the Arabian Gulf to US Gulf Coast (USGC) soared 5.3x (see Exhibit 1).

• In our view, this rebound in tanker rates currently impacts mostly the VLCC segment for now given the lower storage capacity of the Aramax and Suezmax categories. However, MISC has already secured long term agreements with clients for its VLCC vessels.

• Hence, we maintain MISC’s earnings forecasts as spot VLCC prices will not have a significant impact to the group’s earnings. Nevertheless, we view the negative sentiments on petroleum tanker demand due to the impact of the Novel Coronavirus pandemic have been partially alleviated by this tanker rate rebound.

• The stock currently trades at a fair FY20F EV/EBITDA of 9x – near its 3-year average while supported by decent dividend yields of 4.5%.

Source: AmInvest Research - 16 Mar 2020