Investment Highlights

• We maintain BUY on MISC with an unchanged sum-of-partsbased 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.

• Our forecasts are unchanged following an analyst briefing yesterday. These are the salient highlights:

• MISC reaffirmed that the 2022 prosperity tax will not have any impact on the group’s earnings given that its ships are flagged overseas or in tax havens such as Labuan. However, the inclusion of foreign dividends as taxable income could have some longer term implications, which management does not have certainty at this stage. Meanwhile, the imposition of tonnage tax has been deferred to FY24F at this stage.

• The average term-to-spot rate ratio for the petroleum and chemical division slid to 68:32 in 3QFY21 from 72:28 in 2QFY21, largely from the drop in Aframax from 60:40 to 54:46 and Suezmax from 75:25 to 73:27 while VLCC rose from 82% to 87%. The proportion of Aframax spot charters has increased vs. fixed terms stemming from the reduction in lightering demand amid an oversupply of vessels together with the Covid-19-inflicted global supply chain disruptions. While Aframax spot charter rates have recently risen by over 30% from a multi-year low base in August, the positive impact is expected to be slight at this stage. Even so, the easing of OPEC+ quotas Aug–Dec 2021, rollouts of Covid-19 vaccinations and addition of shuttle tankers (1 in 4QFY21 and 5 in FY22F) offer improving prospects for the petroleum segment, which management is hopeful of achieving breakeven in 4QFY21 from a 3QFY21 loss of RM8mil.

• The liquefied natural gas (LNG) division, which accounted for 48% of 9MFY21 operating profit, could have registered a stronger performance if not for higher operating costs arising from higher off-hire and dry-docking days during the pandemic. Hence, LNG revenue rose 6% YoY while its operating profit slid 5% YoY, translating to a 5-percentage point drop in margin to 43%. We expect a flattish 4QFY21 LNG earnings delivery given that all vessels are currently on term charters with 4 units on shortterm tenures until 2022.

• The marine & heavy engineering division’s 3QFY21 losses improved by 24% QoQ from higher revenue recognition from ongoing projects. The group is still in discussions with clients to recover the costs incurred from Covid-19 quarantine costs and movement restrictions as well as higher raw material expenses from the current supply constraints.

Source: AmInvest Research - 19 Nov 2021