Investment Highlights

• We maintain our HOLD recommendation on MISC with an unchanged sum-of-parts (SOP)-based fair value of RM7.70/share, which implies an FY20F EV/EBITDA of 9x – 1 standard deviation below its 2-year average of 10.4x.

• MISC has entered into memorandum of agreements to provide 6 very large ethane carriers (VLEC) over 15-year time charters for Shenzhen-listed Zhejiang Satellite Petrochemical Co Ltd, which produces propylene-based products.

• Expected to commence in 4Q2020, the vessels will be built by Saumsung Heavy Industries and Hyundai Heavy Industries Corp. These newbuild VLECs, which have individual capacities of 98,000 cu meters, will cost US$726mil (RM3.1bil) or US$121mil/unit. This is significantly less than a liquefied natural gas (LNG) carrier, which can cost US$184mil each.

• MISC, which has 29 LNG carriers currently, is already expecting the addition of 4 more units by 1H2023. These 6 VLECs will expand the group’s total vessel fleet, including the LNG and shuttle tankers already contracted to be delivered, to 108.

• Given that spot LNG charter rates have fallen by 65% since the beginning of the year due to low Covid-19 dampened demand and high inventories, we estimate negligible accretion to MISC’s SOP assuming project IRR of 8%, 50:50 equity to debt and interest cost of 4%. As these new charters could increase FY21F-FY22F earnings by a slight 4%, we maintain our forecasts for now, pending the group’s 2QFY20 results next month.

• While LNG, FPSOs and MOPU rates are locked for the longterm, MISC’s earnings volatility is largely affected by spot movements in the petroleum tanker division. 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 albeit 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 tanker charters to stabilise the petroleum division’s highly variable earnings.

• As we had forewarned in May this year, the global cuts in oil production have since caused lower tanker demand, leading to a 83% for the Arabian Gulf to US route since the all-time peak on 17 March 2020. Similarly for the Arabian Gulf to Japan route, rates have fallen by 80% since the year high on 22 April this year.

• The stock currently trades at a pricey FY21F EV/EBITDA of 10x, which translates to an excessive premium of 3.9x – 1.1ppt above the average 2-year premium of 2.8ppt to AP Moller Maersk’s 6.1x.

Source: AmInvest Research - 16 Jul 2020