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.

• The Asian International Arbitration Centre (formerly Kuala Lumpur Regional Centre for Arbitration) has awarded US$352mil (RM1.5bil), comprising US$236mil defects rectification work, US$15mil liquidated damages, US$88mil refund for overpayment of additional lease rates and legal costs of US$13mil but excluding interests charges, to Sabah Shell Petroleum Company Ltd’s (Shell) counter-claim against the delayed Gumusut Kakap semi-floating production system (FPS).

• MISC, which wholly owns the FPS, is allowed to partially offset this sum against a net compensation of US$133mil for variation works, which represents half of an earlier US$266mil award in February 2017 against Shell for disputes over outstanding additional lease rates and variation works in the construction of the semi-FPS.

• While the net legal awards could amount to US$219mil, MISC had earlier indicated that the contract with Shell limits liability to US$200mil (RM862mil). A worst-case scenario would mean that a one-off lump sum provision could translate to half of MISC’s FY20F net profit and could raise its low net gearing from 17% to a still comfortable 20%.

• For now, management has not provided any clarification on the financial impact as MISC is still evaluating options to potentially appeal against the ruling, which could prolong the case.

• If no appeal is made, we view that MISC is likely to mitigate the potentially significant impact by offsetting the award against the FPS’ lease payments over the remaining lease period of 21 years (out of the original 25 years). As this translates to a minimal 2% of FY20F–FY22F earnings, we maintain our forecasts for now.

• Recall that Shell is the operator of the Gumusut-Kakap deepwater project with a 29% interest, ConocoPhillips 29%, Petronas Carigall 16.8%, PTTEP 6.8% and Pertamina 2.7%. Production started in October 2014.

• 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 land-based 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 - 13 Apr 2020