Investment Highlights

• We maintain our HOLD call on MISC with an unchanged sum-ofparts-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.

• Following an analyst briefing yesterday, we retain our FY20F– FY22F earnings, which are 16%–18% below consensus. These are the salient highlights of the briefing:

• As highlighted previously, MISC has moved petroleum tankers from spot to long term, a trend that began over a year ago from 45% in 1Q2018 to 24% in 2QFY20. Currently, the proportion of spot to term charters for the VLCC fleet is 4%, Suezmax 9% and Aframax 29% based on vessel operating days in 2QFY20.

• However, shifting petroleum tanker rates from spot charters to long term partly contributed to the 40% QoQ reduction in the segment’s 2QFY20 revenue to RM1.1bil given that average spot rates for VLCC, Suezmax and Aframax were 143%, 66% and 46% higher respectively than 3-year term contracts, due to the unusually strong surge in floating storage facilities in MarchApril this year. Recall that this was caused by a Covid 19- dampened demand which led to an excessive crude oil glut.

• On the global front, while vessels exiting from floating storage deployment will inflate tonnage capacity, low additions over the next 2 years could provide some relief.

• However, MISC expects LNG charters to be under pressure from reduced global demand, exacerbated by high spot vessel availability with 90 new vessels expected to be delivered by 2021.

• While MISC sold a VLCC called Bunga Kasturi during the quarter with another 3 to be disposed of, the group maintains its strategy to optimise its fleet with the delivery of 3 more Suezmax dynamic positioning shuttle tankers to Petrobras in 2H20.

• By 4Q2020, MISC will deliver 3 of the 6 very large ethane carriers (VLEC) to Shenzhen-listed Zhejiang Satellite Petrochemical Co Ltd, on 15-year time charters. These newbuild VLECs, which have individual capacities of 98,000 cu metres costing US$726mil (RM3.1bil), represent a new foray in a niche market with only 2 other ethane carriers in the world – Mitsui O.S.K Ltd and Denmark’s Evergas. With a projected IRR of low double digits, this project offers improved returns compared to LNG.

• While the group is still contending the Gumusut Kakap semifloating production system legal case against Shell, the provision of US$475mil (RM2bil) in 1QFY20 is sufficient to account for any potential compounding of interest. Management views this to be a long drawn out case potentially over 3 years.

• The stock currently trades at a fair FY20F EV/EBITDA of 9x, which translates to a premium of 1.6x – 1.51ppt below the average 2-year premium of 2.7ppt to AP Moller Maersk’s 7.4x.

Source: AmInvest Research - 14 Aug 2020