Investment Highlights

• We maintain our HOLD call on MISC with an unchanged sumof-parts-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 engagement session with MISC’s president/group CEO Yee Yang Chien yesterday, we retain our FY20F–FY22F earnings, which are 11%–20% below consensus. These are the salient highlights of the briefing:
  • MISC expects a quiet period for new project acquisitions until the end of this year given the dearth of vessel demand against the backdrop of the Covid-19 global pandemic impact which has deferred multiple projects. However, the group aims to consolidate its operations, adopt a highly selective stance on new bidding projects while focusing on executing the jobs which have already been secured to date. 
  • The largest project secured, the Mero-3 (to be named Marechal Duque de Caxias) floating production, storage and offloading (FPSO) vessel charter from Petrobras, will be MISC’s key focus on project execution until delivery in 2H2024.
  • For now, we have not included this RM8.4bil (US$2bil) project, which could potentially add 57 sen to our SOP, based on a 100% equity stake and project IRR of 9%, as MISC has the intention to reduce its stake to below 50% to deconsolidate project debt with other JV partners. Hence the accretion may only reach 4% of our current SOP.
  • Management views this Mero-3 development, which will not involve its 66.5%-owned fabrication yard, Malaysia Marine & Heavy Engineering Holdings, to be completely different from the disastrous Gumusut Kakap semi-submersible floating production system (FPS). For Mero-3, management will control the engineering process which is crucial to execution capability as the group is already familiar with FPSO conversions compared with a one-off FPS structure.
  • Recall that the Gumusut Kakap FPS was delivered back in 2013 and yet still being dragged into a multi-year US$475mil (RM2bil) legal suit currently for defective works, overcharging of lease rates and contention over the effective handover date.
  • Management does not expect significant improvement in petroleum tanker rates with July average rates falling QoQ by 81%–83% for VLCC, Suezmax and Aframax given that Covid-19-dampened crude oil demand has forced oil producers to scale back output. As we have noted earlier, Worldscale tanker rates have dropped by 87% for the Arabian Gulf to US route since the all-time peak on 16 March 2020 (see Exhibit 1).

Source: AmInvest Research - 11 Sept 2020