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 (Exhibit 3). This also implies an FY21F EV/EBITDA of 9x, at parity to its 2-year average.
   
• Our forecasts are maintained following an engagement session yesterday with MISC’s president/CEO Yee Yang Chien. These are the briefing’s salient highlights:
   
• Management expects FY21F petroleum tanker rates to average around the same levels YoY given the continuing low Opec output. Nevertheless, we believe that charter rates could rise seasonally towards the end of the year given that Opec will be gradually raising crude production quotas by 2.1mil barrels/day from May to July this year in tandem with growing demand underpinned by faster Covid-19 vaccination rollouts in developed markets.
  
  Recall the petroleum segment’s commendable turnaround to a 1QFY21 operating profit of RM34mil from a 4QFY20 loss of RM78mil on 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).
   
• MISC is prepared to right size its petroleum tankers by moving into new niche areas with scalable prospects, such as securing the charter for 6 very large ethane carriers for Zhejiang Satellite Petrochemical Co Ltd in July last year. Management plans to avoid over-crowded or commoditized markets that offer unexciting margins, which we view as in line with its 2011 decision to exit the container business.
  
  Similar to its smooth implementation of low-sulphur emission standards last year, the group is preparing to meet new carbon emission requirements which are  being developed by the International Maritime Organization (IMO). Later this month, the IMO will be issuing guidelines on calculations, surveys and verification of the Energy Efficiency Design Index for existing ships, effective in 2023, which will be applicable for all vessels above 400 gigatonnes.
   
• While the vessel specifications may change going forward, MISC still expects to remain in the petroleum tanker segment by 2050 given the continuing need for the crude transportation. Even so, our 4-star ESG rating for MISC is affirmed by its commitment to meet its parent Petronas’ net zero emissions target by 2050 by investing into new greener solutions. By 2023, MISC will be deploying 5 LNG dual-fuel VLCC for Shell and Total. A dual-fuelled LNG vessel, which has been retrofitted, is able to burn LNG as a bunker fuel. Besides gradually replacing its fleet of 44 tankers with dual-fuel vessels, the group is looking at cutting edge technologies involving engines powered by ammonia and LNG combinations. Still at a conceptual stage, hydrogen-fuelled ships are being evaluated currently.
   
• 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 - 2 Jun 2021