Investment Highlights

• We upgrade our recommendation on MISC to HOLD from SELL with a higher sum-of-parts-based fair value of RM7.70/share (from RM6.80/share) which implies an FY20F EV/EBITDA of 9x – 1 standard deviation below its 2-year average of 10.4x.

• Our raised SOP stems from the lower-than-expected legal provisions for Gumusut Kakap semi-floating production system (GKP) of US$475mil (RM2bil) vs. our earlier estimate of US$580mil (RM2.5bil). Management appears comfortable with the provisions to date with MISC likely to appeal over the next 2 weeks against the tribunal’s decision in favour of Shell.

• Nevertheless, these provisions translated to a RM1.2bil loss in 1QFY20 vs. a net profit of RM311mil in 1QFY19, as forewarned in our update on 27 April.

• The group’s 1QFY20 EBITDA rose 17% YoY to RM1.3bil, driven mainly by higher petroleum tanker rates due to land-based storage facilities reaching full utilisation amid an unprecedented drop in Covid-19-depressed consumption globally. This was partly supported by lower dry-docking activities for the LNG division, lumpy Vietnam offshore contract renewal and higher progress billing from the heavy engineering segment.

• The spillover effects from contango trading activities involving the storing of oil offshore by locking in higher future prices have boosted even Aframax vessels as cargoes have been broken up from the larger vessels. YoY, tanker rates in March have soared with VLCC surging by 5.8x while Suezmax by 6.8x and Aframax by 2.6x.

• However, the global cuts in oil production have since caused shipping rates to reverse, plunging 83% for the Arabian Gulf to US route since the all-time peak on 17 March 2020. For the Arabian Gulf to Japan route, rates have fallen by 71% since the year high on 22 April this year (See Exhibit 6).

• We caution that Opec+ cuts in global production could lead to lower tanker demand in 2H20. Hence, while MISC’s 1QFY20 core net profit of RM783mil accounted for 46%–47% of our and consensus’ FY20F earnings, we maintain MISC’s FY20F– FY22F earnings for now given the volatile tanker rate movements amid one-off adjustments.

• Currently, 29% of MISC’s petroleum tankers are on spot, of which the group’s fleet of 12 VLCCs are mostly on long-term charters with 2 expiring this year. Based on charter days, 65% of MISC’s 6 Suezmaxes and 34% of its 30 Aframaxes are on spot rates. Given the volatility of these rates despite the YoY improvement, the group’s strategy leans towards term charters to stabilize the petroleum division’s highly variable earnings.

• The stock currently trades at a pricey FY20F EV/EBITDA of 10.4x, which translates to an excessive premium of 4.2x – 1.5ppt above the average 2-year premium of 2.8ppt to AP Moller Maersk’s 6.1x.

Source: AmInvest Research - 12 May 2020