Investment Highlights

• We maintain BUY on MISC with an unchanged sum-of-parts based fair value of RM7.75/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.

• Following an analyst briefing yesterday, our forecasts are maintained. These are the briefing’s salient highlights:
  • MISC recognised a 1QFY21 cost provision of RM50mil–60mil (12%–14% of group’s 1QFY21 core net profit of RM434mil) for a heavy engineering project, which is at its tail end, due to Covid- 19-related delays. The group hopes to recover the costs from other scope of works of this project at a later stage. Also, MISC does not expect this to recur for other ongoing jobs currently.
     
  • MISC further impaired RM25mil in 1QFY21 for assets which are earmarked for disposals, which we believe may include idle vessels such as Puteri Firus (liquefied natural gas).
     
  • The group registered a construction profit of US$30mil (half of 1QFY21 offshore operating profit) from the US$2bil Mero 3 (to be renamed Marechal Duque de Caxias) floating, production and offloading vessel, which is expected to be delivered in 2H2024. Hence, over the next 3 years, this will continue to underpin MISC’s offshore performance, which contributed 42% of MISC’s 1QFY21 operating profit.
     
  • While spot LNG rates have dropped by 18% YoY to US$32,625/day, this division’s earnings are expected to be accretive as the vessels are secured on long-term charters notwithstanding a contract expiry annually over the next 2 years. The upward trajectory of this segment, which accounted for 52% of 1QFY21 group operating profit, will be supported by the addition of 2 very large ethane carriers in 2021 with another 2 in 2H2023 to the group’s current fleet of 33 vessels.
     
  • The petroleum segment’s commendable turnaround to a 1QFY21 operating profit of RM34mil from a 4QFY20 loss of RM78mil stems largely from a 25% QoQ increase in MISC’s Aframax charter rates, partly offset by a 15% decline in Suezmax and marginal decline in very large crude carriers (VLCC).
     
  • In line with management’s plan to reduce MISC’s exposure to volatile tanker spot rates, the proportion of spot-to-term charter for the petroleum and chemical division slid further to 33:67 from 35:65 in 4QFY20. However, the proportion of spot-to-fixed charters has fallen to 46% from 49% for Aframax and to 26% from 32% Suezmax, while VLCC rose to 11% from 6%. Looking forward, the gradual easing of Opec+ quotas in May–July 2021 and rollouts of Covid-19 vaccinations towards the second half of the year offer brighter prospects for the petroleum segment.
     
• The stock currently trades at an undemanding 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 - 7 May 2021