Investment Highlights

• We maintain our HOLD rating on MISC with a higher sum-ofparts-based fair value of RM8.50/share (from an earlier RM7.70/share) which implies an FY21F EV/EBITDA of 9x, at parity to its 2-year average.
• While awaiting an analyst briefing later today, we have raised MISC’s FY20F–FY22F earnings by 19%–20% as the group’s operations were not as badly affected by the drop in tanker rates, partly cushioned by the heavy equipment segment unexpectedly breaking even in 3QFY20. Our higher earnings forecasts stem from the raising of heavy engineering margins by 5ppt, lower LNG operating costs and reduced interest/minority charges.
• Excluding the legal provision for Gumusut Kakap semi-floating production system of US$475mil (RM1.9bil), asset impairments of RM306mil for its heavy engineering division and RM10mil provision for a floating storage & offloading unit, MISC’s 9MFY20 core net profit of RM1,679mil exceeded our expectations and slightly above street’s, accounting for 79% of consensus earnings vs. 69%–77% over the past 3 years.
• The group’s 3QFY20 core net profit slid 20% QoQ to RM270mil, driven mainly by lower petroleum tanker rates and higher drydocking activities at the LNG segment which reduced vessel earning days.
• As expected, the worst performing division was the petroleum segment which registered a sharp 90% QoQ plunge in 3QFY20 operating profit to RM20mil on depressed charter rates and lower utilisation. The LNG division’s operating profit, which made up 50% of 9HFY20, slid QoQ 32% to RM239mil in 3QFY20.
• The heavy engineering, which registered a 2QFY20 loss of RM100mil due to additional cost provisions and unabsorbed overheads from the Covid-19 lockdown, just managed to break even in 3QFY20.
• As forewarned in our update on 12 May this year, tanker rates have subsided after ferocious contango trading activities from an unprecedented oil glut led to a shortage in offshore storage in March–April. QoQ, spot rates have fallen by 58% for VLCC, 43% for Suezmax and 38% for Aframax in September this year.
• Likewise, low crude demand and the unwinding of floating storage have depressed shipping rates by 89% for the Arabian Gulf to US route since the all-time peak on 16 March 2020. The Arabian Gulf to Japan rates have fallen by 86% (See Exhibit 6).
• Hence, the wintering season is not expected to substantially boost the tanker segment as in the past notwithstanding low global vessel deliveries over the next 2 years on dampened demand prospects.
• The stock currently trades at a fair FY21F EV/EBITDA of 8x - 1 standard deviation below its 3-year average of 9x.

Source: AmInvest Research - 18 Nov 2020