Investment Highlights

• We reiterate BUY on MISC with an unchanged sum-of-parts based fair value of RM7.75/share, which reflects a premium of 3% from our 4-star ESG rating. This also implies an FY22F EV/EBITDA of 7.5x, at 1 standard deviation below its 2-year average of 8.5x.

• While awaiting the announcement of 1HFY21 results on 13 August, we have largely maintained our forecasts which already incorporate soft petroleum charter rates and continued losses from MISC’s heavy engineering division.

• The likely losses for the petroleum segment in the upcoming results are highlighted by the very large crude carriers (VLCC) segment, which fell into negative spot charter rates for the first time in June this year to -US$122 due to overcapacity as world oil exports remained flat and below pre-Covid 19 levels despite the OPEC+ alliance agreeing to raise production from May 2021 to July 2021.

• Likewise, June spot charter rates for Suezmax fell 79% QoQ to US$2,505 and Aframax dropped 68% QoQ to US$6,222. On average, 2QFY21 spot rates declined of 23% for VLCC, 47% for Suezmax and 32% for Aframax.

• Tanker rates have not shown any rebound to date as based on Worldscale rates, the Arabian Gulf to Japan and US Gulf Coast routes registered slight upside currently from the end of June this year (Exhibit 1).

• The negative impact to the group’s 2QFY21 earnings could be partly mitigated by the proportion of spot-to-term (STT) charter rates for the petroleum and chemical division at 33:67 as at 31 March 2021. For Aframax, the STT was 46%, Suezmax 26% and VLCC 11%.

• Nevertheless, compared to the petroleum segment’s 1QFY21 operating profit of RM34mil, we expect 2QFY21 performance to reverse into a loss. Recall that this division registered a 4QFY20 operating loss of RM78mil.

• Additionally, the group’s 66.5%-owned Malaysia Marine & Heavy Engineering Holdings (MMHE) posted a 1HFY21 net loss of RM139m from higher cost provisions in the heavy engineering division from Covid-19 movement restrictions together with low volume of marine repair business as clients prefer Singapore yards which offer less border restrictions given a higher vaccination regime.

• Even though MMHE has been able to secure the RM1bil Jerun central processing platform project for the SK408W block, off Sarawak from SapuraOMV in April this year, we expect the heavy engineering division to continue registering losses in FY21F–FY23F as this division has been loss-making over the past 3 years, including pre-pandemic FY18–FY19 periods.

• All in, we are projecting MISC’s FY21F net profit to decline by 14% to RM1,858mil as the losses from the petroleum and heavy engineering divisions could be partly offset by the absence of RM50mil–RM60mil one-off cost provision for a heavy engineering project in 1QFY21 and the continued construction profit from the US$2bil Mero 3 (to be renamed Marechal Duque de Caxias) floating production, storage and offloading vessel, which is scheduled for delivery in 2H2024.

• Going forward, we expect gradual improvement to the petroleum tanker rates as OPEC+ has decided to raise production levels by 2mil barrels from August to December 2021. Together with the upcoming delivery of 2 LNG carriers, 5 VLEC and 2 DPST this year, these underpin our FY22F earnings growth expectations.

• MISC currently trades at an attractive FY22F EV/EBITDA of 6x – 2 standard deviation below its 3-year average of 8.5x, supported by compelling dividend yields of 5%.

Source: AmInvest Research - 5 Aug 2021