Investment Highlights

• We maintain our BUY 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

• Following the 4QFY20 analyst briefing yesterday, our forecasts are maintained. These are the briefing’s salient highlights:
  • MISC recognised a maiden revenue of US$95mil and operating profit of US$22mil in 4QFY20 from the construction of the US$2bil Mero-3 floating production, storage and offloading vessel (FPSO), which will be built over 3.5 years until 2H2024. Assuming a lower margin of 18%, we estimate that this project will contribute earnings of over US$100mil (RM410mil) to the group.
     
  • Management views, as do we, that tanker rates will remain depressed in 1Q2021 due to weak crude demand amid global tonnage rising by over 20mil dwt this year, partly offset by expectations of increasing demolition of old vessels after being offloaded from floating storage usage. Hence, the group does not expect any substantive recovery in the current quarter from the petroleum division’s 4QFY20 operating loss of RM78mil.
     
  • Nonetheless, we estimate that the additional Mero-3 contribution should be able to offset this main drag on group earnings in 1HFY21. By 3QFY21, with the global rollout of Covid-19 vaccinations, we are optimistic that improving economic growth prospects and rising transportation needs will support higher tanker rates towards the traditional seasonal end of the year.
     
  • The group’s 49%-owned FPSO Espirito Santo registered a one-off US$50mil (RM202mil) adjustment from operating to finance lease accounting as its charter was renewed for another 5 years by Shell Brazil. Excluding this, MISC’s 4QFY20 core earnings still rose 8% amid weak tanker rates.
     
  • In line with management’s plan to reduce MISC’s exposure to tanker spot rates, the proportion of spot to term charter for the petroleum and chemical division was unchanged QoQ at 35:65 in 4QFY20. However, the proportion of spot to fixed charters has fallen to 49% from 51% for Aframax and 6% from 9% for VLCC, offset by Suezmax rising to 32% from 19%.
     
  • While spot LNG rates have risen by 45% YoY, the group’s LNG division will not benefit significantly as the vessels are secured on long-term charters notwithstanding a contract expiry annually over the next 2 years. Even so, the upward trajectory of this segment’s operating profit, which accounted for 53% of FY20 group, will be underpinned by the addition of 2 carriers in 2021 with another 2 in 2H2023 to the group’s current fleet of 33 vessels.

• The stock currently trades at a fair FY21F EV/EBITDA of 8x – 1 standard deviation below its 3-year average of 9x, while sustaining a compelling dividend yield of 5%.

Source: AmInvest Research - 19 Feb 2021