Investment Highlights

• We maintain our HOLD rating on MISC with an unchanged sumof-parts-based fair value of RM8.50/share, which implies an FY21F EV/EBITDA of 9x, at parity to its 2-year average.

• Pending an analyst briefing later today, we maintain MISC’s FY21F–FY22F earnings as the group’s FY20 core net profit, excluding impairments of RM2.2bil, came in within our expectations albeit 6% above general consensus. The group declared a 4QFY20 dividend of 12 sen, which brings FY20 DPS to 33 sen as expected.

• The impairments included 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.

• The group’s 4QFY20 core net profit soared 83% QoQ to RM495mil, driven mainly by a one-time gain from a 5-year charter extension for its 49%-owned floating production, storage and offloading (FPSO) vessel Espirito Santo located in the BC-10 field, Campos Basin off Brazil.

• The worst performing division was the petroleum segment which plunged to a 4QFY20 loss of RM78mil due to depressed tanker rates and lower vessel utilisation. However, MISC’s 4QFY20 operating profit slid by only 3% to RM319mil as the petroleum division’s loss of RM78mil was largely offset by a 74% increase in offshore earnings.

• The sharp escalation in offshore operating profit stemmed from the maiden construction earnings of the group’s US$2bil Mero-3 FPSO (to be renamed Marechal Duque de Caxias) as the contract was secured in August last year. This raised the offshore division’s contribution to FY20 group operating profit to 25% from 24% in FY19.

• The LNG division’s profit, which accounted for 53% of FY20 group operating profit, marginally dipped to RM238mil in 4QFY20 due to higher operating costs despite lower drydocking activities which raised the segment’s revenues by 6%. The heavy engineering slipped back into a small loss of RM8mil from a slight breakeven position in 3QFY20 due to lower margins on the early stage of progress billings.

• As we had earlier forewarned, the wintering season did not substantially boost the tanker segment as in the past due to Covid-19 dampened demand prospects. QoQ, spot rates have fallen by 20% for Suezmax and 22% for Aframax in December last year, while VLCC was stable at US$19,465/day.

• Although tanker rates are likely to be suppressed in the near-term due to the Covid-19-induced economic fallout and the unwinding of floating crude storage built-up in June last year, we expect a vaccine-driven recovery in global economic growth and vehicle traffic by 2H2021 to ramp up crude demand and charter rates. Together with the delivery of 2 LNG carriers, 5 VLCE and 2 DPST this year, these underpin our modest FY21F earnings growth expectations. MISC currently trades at a fair FY21F EV/EBITDA of 8x – 1 standard deviation below its 3-year average of 9x.

Source: AmInvest Research - 18 Feb 2021