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 4-star ESG rating. This also implies an FY22F EV/EBITDA of 8x, 1 standard deviation below to its 3-year average of 9x.

• Pending an analyst briefing later today, we maintain our forecasts as MISC’s 9MFY21 core net profit of RM1,432mil (-14% YoY), excluding net impairments of RM74mil and unrealised forex gain of RM12mil, was within our expectations but above consensus, accounting for 77% of our FY21F net profit and 82% of street’s.

• As a comparison, 9M accounted for a 69%–78% of FY18–FY20 core net profit. The group declared a third interim dividend of 7 sen (flat YoY), which translates to a flat 9MFY21 DPS of 21 sen that is also within our expectation.

• The group’s 3QFY21 core net profit decreased by 28% QoQ to RM417mil mainly from a one-off 2QFY21 compensation of up to RM180mil for a contract renegotiation of 2 US-based Aframaxsized modular capture vessels, involving the reduction of incharter lightering business over 3 years. This caused the petroleum division’s 3QFY21 RM8mil loss from a 2QFY21 RM212mil operating profit despite improved spot tanker rates.

• We note that 3QFY21 spot rates have substantively improved for very large crude carriers (VLCC), rebounding to US$2K/day in September 2021 from an abnormally negative US$122/day in June this year while Suezmax rates surged 72% QoQ to US$4.5K/day. While Aframax rates were down 35% QoQ to US$4K/day in September 2021, this was still a 31% improvement from a multiyear low of US$3K in August this year.

• In 3QFY21, only the liquefied natural gas (LNG) and offshore businesses were profitable. LNG operating profit rose 7% QoQ to RM314mil with the delivery of Diamond Gas Victoria in July this year and LNG carrier Diamond Gas Crystal in May 2021. The offshore segment’s 3QFY21 operating profit climbed 30% QoQ to RM243mil mainly from the construction of the US$2bil Mero 3 (to be renamed Marechal Duque de Caxias) floating production and offloading vessel, expected to be delivered in 2H2024.

• The worst performing division continued to be the heavy engineering segment despite reducing its 3QFY21 loss by 24% QoQ to RM20mil from higher cost provisions while the marine repair business was impacted by customers shifting to Singapore which has less stringent Covid-19 border restrictions.

• Going forward, we expect modest improvement to petroleum tanker rates as OPEC+ plans to raise production levels by 2mil barrels from August to December 2021 amid the winter season, which is usually the peak tanker cycle. Together with the delivery of 6 dynamic positioning shuttle tankers and 2 VLCCs next year, this is expected to support FY22F earnings growth prospects.

• MISC currently trades at an attractive FY22F EV/EBITDA of 7x, 2 standard deviations below its 3-year average of 9x.

Source: AmInvest Research - 18 Nov 2021