Investment Highlights

• We maintain our HOLD recommendation on MISC with an unchanged sum-of-parts-based fair value of RM7.80/share, which implies an FY20F EV/EBITDA of 9x – its 3-year average and at a 40% premium to AP Moller Maersk.

• In a filing with Bursa Malaysia, MISC said it has secured 2 long-term charters to own and operate 2 newbuild liquefied natural gas (LNG) dual-fuel VLCCs from France-based Total, which will commence operations in international waters by 2022. The announcement did not provide any details on the contract value or duration for this segment which accounted for 58% of MISC’ FY19 pretax profit while offshore contributed 24% and petroleum 18%.

• Recall in October last year, MISC signed 15-year firm charters worth US$711mil for 2 newbuild LNG carriers with Exxon Mobil Corp. Assuming the same value for these 2 new charters with a pretax margin of 40%, these will translate to a slight 2% increment to our FY22F net profit.

• While we are mildly positive on this development, our forecasts are unchanged for now given the rising risks that LNG charters may be cancelled notwithstanding the long-term duration of these contracts.

• Back in 2016–2017 following the previous oil price collapse, several MISC’s LNG charters were cancelled which led to substantive provisions for diminution in value for multiple vessels.

• Last month, China’s national oil companies including China National Petroleum Corp and China National Offshore Oil Corp issued force majeure notices on all LNG imports, refusing shipments due to the glut arising from the impact of the Covid- 19 outbreak which depressed domestic consumption. The companies affected were likely Total, Shell and Qatargas.

• Including 4 new builds, of which 2 will be delivered in 1H2021, MISC’s LNG fleet will expand from 29 currently to 35 by 2023. Globally, 123 additional LNG carriers or 23% are expected to be added to the existing 536 vessels over the next 3 years.

• A bright spot for MISC would be the higher petroleum VLCC rates due to Saudi Arabia securing additional storage capacity following the expiry of Opec quota restrictions while landbased storage facilities are reaching full utilisation amid an unprecedented drop in Covid-19-depressed consumption globally. However, we do not expect any substantive near-term earnings impact as MISC has already secured long-term agreements with clients for its VLCC vessels.

• 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%.

Source: AmInvest Research - 8 Apr 2020