Investment Highlights

• We maintain our HOLD call on MISC with unchanged forecasts and fair value of RM7.70/share, which is now based on a 5% discount to our revised RM8.11/share. This implies an FY20F EV/EBITDA of 9x – 1 SD below its 2-year average of 10.4x.
• MISC has accepted a letter of intent and secured a time charter to provide the Mero-3 floating production storage and offloading (FPSO) vessel that could cost up to US$2bil (RM8.4bil) for Petróleo Brasileiro (Petrobras). The vessel will be deployed offshore Rio de Janeiro in the Libra block, Santos Basin, Brazil over 22.5 years commencing in 2H2024.
• The Mero-3 FPSO, to be officially called Marechal Duque de Caxias, will be similar in size to the first 2 units ordered by Petrobras, and will feature topsides modules able to process 180,000 barrels per day of oil and 12 million cubic metres per day of natural gas.
• The major work is unlikely to be undertaken by MISC’s 66.5%- owned fabrication yard, Malaysia Marine and Heavy Engineering Holdings, given the client’s local content requirement of 40%. We note that the group is still working through the legal and financial aftermath of the US$2bil Gumusut Kakap semi-submersible floating production system after being delivered in 2013. In 1QFY20, MISC made a legal provision of US$475mil (RM2bil) against Shell’s suit for defective works, over-charging of lease rates and contention over the effective handover date.
• Upstream reported that MISC has lined up at least 7 Asian yards to undertake the conversion process. Five Chinese yards – Cosco Shipping Heavy Industry, CIMC Raffles, CMHI, Bomesc Offshore Engineering and DSIC – as well as Singapore-based Sembcorp Marine and Keppel yards are in negotiations with MISC. Most of the yards, including Cosco and CIMC Raffles, are bidding for both hull conversion and topsides fabrication, while Bomesc is only considering the topsides job.
• While the announcement did not reveal financial terms due to confidentiality requirements, Upstream indicated that MISC’s day rates are close to US$700,000, which was offered by the only other bidder, Netherlands-based SBM Offshore.
• Assuming operation and maintenance account for 15% of revenue, we estimate that the project’s IRR could be 9%, lower than 15% for Yinson’s Marlim 2 FPSO which is also chartered by Petrobras. Nevertheless, the sheer scale of the project alone adds 7% or 57 sen to MISC’s SOP assuming a 100% stake, with a debt-to-equity ratio of 70:30 and WACC of 6%, unless MISC invites other joint venture partners to mitigate execution and financial risks.
• While positive on this development, we are cautious on the direction of tanker charter rates which are trending lower due to weak crude demand currently with Worldscale rates down by 89% for the Arabian Gulf to US route since the all-time peak on 16 March 2020 (See Exhibit 1). While partly mitigated by declining exposure to spot charters, we expect further asset impairments and weak earnings over the near and medium term. 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 - 18 Aug 2020