Investment Highlights

• We maintain BUY on MISC with an unchanged sum-of-parts based fair value of RM8.50/share, which reflects a premium of 3% from our ESG rating of 4 stars. This also implies an FY21F EV/EBITDA of 9x, at parity to its 2-year average.

• MISC has secured long-term charter contracts to own and operate 3 newbuild LNG dual-fuel very large crude carriers (VLCCs) from Shell Tankers (Singapore) Pvt Ltd to operate in international waters for 7 years, commencing in 3Q2023.

• A dual-fuelled LNG vessel, which has been retrofitted, is able to burn LNG as a bunker fuel. According to a Channoil Consulting-Gibson Shipbrokers study, VLCCs can save up to US$7.7K/day from using LNG instead of conventional bunker fuel that is compliant to the International Maritime Organization’s sulfur standards.

• This is not the first time that MISC is involved in LNG dual-fuel petroleum VLCC tankers as the group had earlier secured 2 such charters from Total in April 2020, which are scheduled for delivery in 1H2022. Hence, these 3 new charters from Shell will increase the group’s VLCC fleet by 27% to 15 by 2023.

• The announcement did not reveal the capex nor charter rates of the vessels. However, assuming a capex of US$6mil to add a dual-fuel LNG engine system to a newly built VLCC could raise the capex by 7% to US$94mil/vessel. As such, we expect that the total capex of US$282mil (RM1.2bil) for these 3 new vessels could be part of MISC’s growth capex of US$1bil annually.

• Assuming 3-year VLCC charter rates of US$28K/day over 20 years and operating costs of US$6K/day, we estimate that these charters could generate a mild project IRR of 6% and slight impact to FY23F earnings. Hence, we maintain MISC’s FY21F–FY23F earnings.

• Meanwhile, we expect tanker rates to remain depressed in 1H2021 due to the extension of Saudi Arabia’s quota in April this year and 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.

• Nonetheless, we estimate that the additional construction earnings from the US$2bil Mero-3 FPSO project should be able to offset this main drag from the tanker segment 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 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 - 12 Mar 2021